Based on QLG’s presentation at our recent Asean and Hong Kong Corporate Day, we gather that its integrated livestock farming (ILF) business is poised for a comeback in FY14 on the back of lower feed raw material costs and better egg prices. Given the aggressive expansion of its marine segment and fatter margins from ILF, we maintain BUY on the stock, with our FV at MYR3.50.

¨      Exciting year for marine activities. QL Resources (QLG) currently has the capacity to produce 30k tonnes of surimi, of which 25k tonnes comes from its Malaysian facility and 5k tonnes from its Indonesian unit in Surabaya. The Group pumped up the capacity of its Surabaya plant to 10k tonnes in 2H last year, up from 5k tonnes previously. To gain a strong foothold in China, QLG had in March acquired Zhongshan True Taste Food Industrial, which is mainly involved in the manufacturing surimi-based products. It also recently invested in a prawn aquaculture business in Kudat, Sabah, which is slated to be ready by 4QFY15.

¨      Better outlook for ILF. ILF’s margin has been eroding since 1QFY13 due to weaker egg prices and the rising cost of corn and soybean. Numbers from the Group’s palm oil activities (POA) were not encouraging as well, no thanks to receding crude palm oil (CPO) prices. In light of the stabilizing raw material costs and the recent recovery in egg prices, we expect its ILF division to deliver better margins in FY14. The Group will be releasing its FY13 results on 22May. We believe the results will be flattish y-o-y on weaker margins due to higher raw material cost. As such, we trim our FY13 numbers by 2.8% to reflect the thinner margin from the ILF division and correspondingly lower our FV a tad to MYR3.50, from MYR3.52.

¨      Maintain BUY. We remain optimistic on QLG due to: i) strong growth in its marine division arising from the expansion of its Indonesian operations and better fish landing, ii) the recovering margin in its ILF division thanks to lower raw material prices moving forward, and iii) the maturing of its East Kalimantan plantation. We believe this is a good timing to look into the stock, in order to ride on the recovery of its ILF division and its regional expansion story.

Source: RHB