We gave a buy recommendation for this company a long time ago (Aug 2016) and we held to it since then.

You can see our post from 2016 here.

There really isn’t much to say rather than continuous revenue growth quarter over quarter. That is why you don’t see many follow up post other than the Family Mart review that we gave earlier. But it really gets a little tricky now.

With EPF and Amanah Saham scooping up the shares from the open market, it pushed the price up and so as the PE rising steeply. We bought in while it was trading at a PE of 28 but it turned to 42 at the current price.

Obviously the consumer sector gets a boost with GST being zero rated but this stock trades 2nd most expensive in valuations among the other big names with Nestle leading the way demanding the highest premium.

At the current price it is trading, we believe that a review is needed on what to come and either it is still worth holding past this quarter’s results which would probably be reported next week.

Revenue Growth

The revenue had grown close to RM 450 million in the over the past 2 years and we are still awaiting those growth numbers to translate into net profit. We believe that market had expected net profit to catch up with the revenue growth and paid a high premium for it.

Furthermore, our revenue growth target by 2020 were estimated to be RM 700 million a year. RM 450 million growth over these two years showed that more than half of the target had been fulfilled. With two more years to go, the actual would actually breach our estimate earlier and re-value the stock price higher.

But Could Earnings Catch Up?

A quick dive into the gross margins. We compared gross margins and net margins two years ago versus last 4 reporting quarters

Straight off from the table above, we can tell that gross margin as well as net margin declined by merely less than 1% while revenue grew 15% over the last 2 years.

Being very involved focusing on growing the revenue, increasing the efficiency of the new business segment might be neglected. New operations such as frozen products manufacturing, broiler and layer farms are likely the reason why we see lower margins overall.

We then take a look at the segments reported.

That being said, we should still place some hopes that margins will catch up when the new operation facilities gets oiled up smoothing operations and efficiency.Except palm oil activities, the other two segments see a decline in margins reported which proven our earlier guess correctly. Normally, this is the common case for a business which sees a sudden growth in revenue.

Renewing Valuations

Assuming that in FY2020 we see another RM 350 million rise in revenue which translates to forward FY2020 EPS of RM 0.141, we are looking Forward PE of 18.38 at the current price versus the current PE of 42.

The gap between forward PE versus current is huge when we first evaluated this company. The stock was trading merely PE of 28 versus our forward PE estimate of 14 times earnings.

To Sell or Hold?Things had really gone expensive over these two years and we really think that it get expensive. From our initiation which we thought to be expensive to higher valuations at the moment, it really sets us in a dilemma.

We think that we could still squeeze in one quarter before start liquidating our positions. This quarter’s report would include the month February which is Chinese New Year. We believe the CNY effect is big and makes it QL’s top month compared to any other.

Much similar to Nestle, which broke record revenue for Q1 2018 with RM 1.4 billion in revenue, we are betting on increased consumer spending for Q1 2018 as well for QL Resources.

We would maintain a HOLD if the revenue for Q1 2018 breaches all time high of RM 892 million. But we would immediately SELL at opening price if the revenue is below the the all time high.