Remains positive post two-day trip to Kota Kinabalu. We visited QL Resources’ poultry farm in Papar and surimi plant in Tuaran, both located approximately an hour’s drive from KK, Sabah. Despite the strong run-up in consumer stocks share prices, QL (+2.6% YTD) is relatively cheap at 16.5x FY13 PER, below the 18x FY13 PER average of our universe of consumer stocks. Growth remains intact, with its Indonesian operations expanding at a faster pace. We remain positive. Reiterate BUY with an unchanged DCF-based TP of MYR3.75.

High biosecurity measures. We witnessed strong hygiene measures in QL’s poultry farm including sanitising and disinfecting all vehicles that enter the farm area. QL’s broiler farm in Papar has the capacity to produce about five batches of chickens a year, with c.200,000 chickens in each batch. QL usually culls and sells its birds after 40-42 days (2.2- 2.4kg) and takes a further one to two weeks to collect the manure, clean and dry up the farm. We understand that the mortality rate for a day-old-chick (DOC ) is about 10%. The farm supplies chicken for local consumption including the McDonald chains in Kota Kinabalu. After the relocation of a new batch of day-old-chicks, it takes only one labourer per broiler house on average to run the farm.

Tuaran, the next destination. The marine plant in Tuaran produces surimi, fishmeal and frozen fish. We were impressed that QL’s production of surimi is highly automated except for the beheading process. In the beheading section, labourers are paid by weight to ensure efficiency and to minimise waste. QL owns 23 fishing boats with 10 in Sabah and another 13 in Endau (Johor), but the fleet supplies merely 5% of QL’s raw material requirements.

High barriers to entry. After seeing QL’s operations in Sabah, we reckon that despite selling simple products, the industry offers high barriers to new entrants, mainly due to economies of scale, its capitalintensive nature and varying food quality and safety standards in different countries. QL has a Halal certification, and also passes the ISO, EU and Japanese standards of food quality.

Source: Maybank Research - 08 Nov 2012