QL Resources

By OSK Research
12 Apr 2012


Mini Conglomerate in The Making
Following our recent meeting with  management, we are optimistic that QL Resources will continue to deliver solid earnings growth in line with its on-track expansion in the ASEAN region. We are expecting the group’s Indonesia and Vietnam operations to start contributing in FY13. Maintain BUY with a FV of RM3.64, given its solid performance and resilient business nature.


Still rocks. QL Resources transformed from a livestock feed trading company (that was
complemented by its smaller fisheries and palm oil businesses) into a leading marine
and poultry egg producer (complete with a fast-growing palm oil business) over the
years. With exposure to three sustainable basic food industries, its strong business
model has enabled QL to deliver sterling results on a consistent basis. Over the years,
the company has expanded its operations through upstream/downstream integration,
innovation and acquisition.

Regional expansion bearing fruits.  Going forward, we believe the earnings
excitement will largely come from its regional exposure in Indonesia and  Vietnam. On
the marine side, QL is adding another 5k tonnes p.a. capacity to its current surimi and
fishmeal production facilities in Surabaya, increasing the overall production capacity to
10k tonnes p.a. by end-FY13. Also, we are expecting contributions from Indonesia and
Vietnam’s poultry operations to kick in from FY13 onwards, given that the expansions
are all on track. As for the palm oil division, the 20k ha plantation and new CPO mill in
Indonesia will undoubtedly bring the company to the next level.

Defensive in nature.  As QL is involved in the basic food industry where demand is
resilient even during economic slowdowns, we are confident that the company’s outlook
remains promising. With  QL venturing into  Asean countries with growing populations
such as Indonesia and Vietnam,  such regional expansions could open up new and
profitable markets that bode well for the company’s future growth.

Maintain BUY. Our FV of RM3.64 is based on 19x CY12 EPS. Given the recent share
price retracement (which was largely due to the market correction), we see this as a good
opportunity to BUY QL shares. This stock is one of our Top 2012 Buys in view of its highly
defensive nature and aggressive overseas expansion strategy.


DEVELOPING INTO A MINI CONGLOMERATE?
Fish is wealth.  As a leading marine products player in Malaysia with four marine manufacturing plants
locally, QL has ventured into Indonesia by setting up a surimi  and fishmeal plant, each  with a 5k tonnes
capacity p.a. in Surabaya. Overall, fish landing in Indonesia is growing at a faster pace compared to Malaysia and the timely  expansion in Surabaya will provide some relief to  the supply-constrained  marine business. Given the fatter margins arising from lower wages and bountiful marine supply in Indonesia, it is also adding new production capacity of 5k tonnes p.a. each for its surimi and fishmeal operations by 4QFY13, boosting the production capacity to 10k tonnes p.a.

Egg-citing ahead.  Attempts at replicating the success of  its integrated livestock  farming in Vietnam and
Indonesia are bearing fruits as well. These two markets are relatively untapped as the egg consumption per
capita was low at 60 eggs compared to Malaysia’s 320 eggs per capita, indicating room for more upside. QL’s modern closed house poultry farms are  fully enclosed, with tight bio-security facilities and minimal human contact to prevent the spread of diseases. The Vietnam poultry farm has ramped up its production from 80k to 200k eggs per day (epd) currently, aiming to achieve 500k epd by March 2013.  Similarly, production in Indonesia increased to 300k epd from 110k previously, targeting to hit 1m epd by March 2013.

Palm  oil. QL has 20k  ha plantation under development in Indonesia and 1.2k  ha of  mature  plantation  in
Sabah. Besides the new CPO mill in Kalimantan which was commissioned in Feb 2012, it has another 2 CPO mills in Tawau, Sabah as well. In order to diversify its revenue, the palm oil mill effluent will be converted into renewable energy through its biogas plant (2MW) which will  operate commercially by this month. Furthermore, the  company is  looking at converting palm waste  into palm pellet for biomass energy. It is currently at the final stage of commissioning and commercial production testing, with the palm pellet plant slated to be fully completed by Dec 2012.


Price- RM3.15
Fair value- RM3.64


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