QL Resources. Company Update. Surimi Galore BUY. MALAYSIA EQUITY Investment Research Daily News

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Curtis Fox
5 years ago
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1 PP10551/10/2010(025682) 16 August 2010 Law Mei Chi +60 (3) Company Update QL Resources Surimi Galore MALAYSIA EQUITY Investment Research Daily News BUY Target Previous Price RM5.20 RM4.65 RM4.46 CONSUMER FOOD QL RESOURCES is primarily involved in marine processing manufacturing, integrated livestock farming and palm oil activities. Stock Statistics Bloomberg Ticker QLG MK Share Capital (m) Market Cap (RMm) week H L Price (RM) mth Avg Vol ( 000) YTD Returns 37.9 Beta (x) 0.79 Major Shareholders (%) CBG Holdings 47.3 Farsathy Holdings 13.6 Share Performance (%) Month Absolute Relative 1m m m m month Share Price Performance 5.00 We came away from our visit to QL last Monday assured of the viability of its new expansion in Indonesia and Vietnam. The expansion exercise will boost revenue growth of its MPM and Vietnam layer farm by 16.5% and 3.1% respectively as it may take time to ramp up its target capacity and production. As such, we are keeping our forecast for FY11 but raise our estimates for FY12 by 12.2%. We are revising our TP from RM4.65 to RM5.20 as we roll over to FY12 from FY11 EPS (based on 15x PER). With a 16% price upside on the stock, we reiterate our Buy call on QL. Venturing to the South-East Asia region. We had a meeting with QL Resources management last Monday, which mainly focused on its ventures in Indonesia and Vietnam. To recap, QL will start its first surimi and fishmeal plant in Surabaya, Indonesia, a new breeder and layer farm in Cianjur District, also in Indonesia, and a breeder farm in Tay Ninh in Vietnam. The discussion with the management reaffirms our positive view on QL as its expansion plans are progressing well and is expected to start contributing in FY12. Marine Processing Manufacturing (MPM). QL is constructing Phase 1 of its surimi and fishmeal plant in Surabaya, Indonesia, which is expected to start operation by early FY12 at a target production capacity of 5000 tonnes of surimi and 5000 tonnes of fishmeal. QL is able to capitalize on the abundant marine resources as well as Surabaya s geographical advantage and we believe this will create opportunities for QL given the huge market potential and QL s strong presence in the surimi market in Asia. Integrated livestock farming (ILF). Apart from its MPM business, QL has also plans for 2 new layer farms in Vietnam and Indonesia, targeting 500k eggs per day. Aside that, QL will also invest in a breeder farm in Indonesia 12m day old chicks (DOCs) a year. We see potential growth in these countries due to low consumption of eggs as compared to Malaysia Jan-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Palm oil activities (POA). Meanwhile, on its palm oil activities, QL has two milling plants and a new milling plant in Kalimantan (to be completed by Dec 2011) which will facilitate the milling of FFB harvested from the Kalimantan estates. QL had previously acquired 20,000 hectares of oil palm estates in Eastern Kalimantan, of which 7500 hectares being planted to date. It is estimated that by 2013, it would have planted ~15,000 hectares in Indonesian estates and we expect earnings to contribute from 2014 onwards. FYE Mar (RMm) FY08 FY09 FY10 FY11f FY12f Revenue 1, , , , ,792.1 Net Profit % chg y-o-y Consensus EPS (sen) DPS (sen) Dividend yield (%) ROE (%) ROA (%) PER (x) BV/share (RM) P/BV (x) EV/ EBITDA (x) OSK Research See important disclosures at the end of this report 1

2 KEY HIGHLIGHTS UPDATES ON QL S NEW VENTURES Venturing to the South-East Asia region. We had a meeting with QL Resources management last Monday, which mainly focused on its ventures in Indonesia and Vietnam. To recap, QL will start its first surimi and fishmeal plant in Surabaya, Indonesia, a new breeder and layer farm in Cianjur District, also in Indonesia, and a breeder farm in Tay Ninh in Vietnam. The discussion with the management reaffirms our positive view on QL as its expansion plans are progressing well and is expected to start contributing in FY12. Figure 1: QL s regional expansion Source: OSK, Company website Surabaya plant to be ready soon. QL is currently constructing Phase 1 of its surimi and fishmeal plant in Surabaya, Indonesia, which is expected to start operation by early FY12. The new plant is target to have an annual production capacity of 5000 tonnes of surimi and 5000 tonnes of fishmeal. The capital expenditure for the 10ha Surabaya plant is about USD10m (approximately RM31.73m as per yesterday s exchange rate of RM3.173 to USD1). We believe this will create more opportunities for QL given the huge market potential as well as QL s strong presence in the surimi market in Asia. Why Surabaya? Being the world's largest archipelago with 13,667 islands, Indonesia is rich in fishing resources, with a total catch of 4.1m tonnes (based on 2000 figures), which ranked the country as the world s sixth largest fish catch. As such, the venture in Surabaya will ensure QL s fish supply during the low fishing season in Malaysia and support its MPM earnings during the monsoon season. Geographically good for exports. Through this new venture, QL would be using Surabaya port, which is one of the main trading ports in East Indonesia with international port facilities. QL will be able to capitalise on the facilities available since the new venture caters mainly for exports. OSK Research See important disclosures at the end of this report 2

3 Potential Phase 2 expansion. Although management did not provide details on its expansion plan for Phase 2, we believe QL is likely to move downstream by processing surimi based products. We see potential demand from the locals for its surimi based products given the huge population size of ~7 times the size of Malaysia. At the same time, it can also tap into Indonesia s well-loved beef ball dish by offering fish balls as a healthier alternative to beef balls. Hello Vietnam and Indonesia. Apart from its MPM business, QL has also invested in a layer farm in Vietnam as well as 1 layer and 1 breeder farm in Indonesia. The layer farm in Vietnam is expected to produce some 500k eggs a day. We are positive on QL s exposure in Vietnam, where the per capita egg consumption of 70 eggs per year is much lower compared to Malaysia s 220 a year with much potential for growth. Meanwhile, QL will commence construction of a layer and breeder farm in Indonesia, with Phase 1 of the project expected to produce 500k eggs per day and 12m day old chicks (DOCs) a year. The plant, for which capex is estimated at USD20m (~RM63.46m), is expected to be completed in 7 months. We believe that similar to Vietnam, there is plenty of room for growth as Indonesia s market for chicken eggs is still small and utilizes obsolete technology. Substantial contribution from CPO. QL has invested in palm oil activities (POA) in Kalimantan, which the company has hinted would contribute from 2014 onwards. QL had previously acquired 20,000 hectares of oil palm estates in Eastern Kalimantan with 7500 hectares planted to date. It is estimated that by 2013, it would have planted ~15,000 hectares in Indonesian estates. QL has two milling plants and acts as a middle-man earning milling margins, whereby it buys fresh fruit bunches (FFB) from farmers and sells the CPO to the local refineries. As the trees start to mature, we believe palm oil earnings would come in gradually. QL has also allocated capex of USD15m (RM47.6m) for a new CPO milling plant in Kalimantan to be completed by Dec This plant will facilitate with the milling of FFB harvested from the Kalimantan estates. NEW CAPEX FOR GROWTH Increasing capex for future growth. QL doubled its budgeted capex for FY11 and FY12 to RM200m per year as compared to its normal capex of RM70-90m. The new budgeted capex is mainly centered on POA and ILF. Aside from its existing expansion as per earlier mentioned, it is also used to invest in new mills and other downstream palm based activities as well as new deep sea vessels and potential local and regional merger and acquisitions. Slight impact to its net gearing. Due to increased borrowings and a current net cash of RM32.53m, this translates to a current net gearing of 0.6x. As half of the new capex will be financed through borrowings, this may potentially increase its net gearing to 0.7x. Nonetheless, over the long term, management guided that its net gearing would not exceed 0.5x. Its current interest cover is 10.9x. VALUATION & RECOMMENDATION Maintain Buy. We expect topline growth to come from both QL s Surabaya surimi plant and layer farms. Its surimi operation, which will only commence in early FY12, will boost its MPM growth by 16.5% after imputing an initial production boost of 8%. Meanwhile, its Vietnam layer farm will commence in early FY12. We expect its ILF topline to grow by 3.1% as it may take time to gradually increase to its targeted egg production of 500k eggs per day. As most of QL s new ventures will kick start in early 2012, we keep our forecast for FY11 but expect a 12.2% earnings growth in FY12. However, we are revising our TP from RM4.65 to RM5.20 as we roll over to FY12 from FY11 EPS (based on 15x PER). We like QL s resilient business as well as strong management team, which will continue to drive growth in all its three core segments. Given the 16% price upside on the stock, we reiterate our Buy call on QL. OSK Research See important disclosures at the end of this report 3

4 EARNINGS FORECAST FYE Mar (RMm) FY08 FY09 FY10 FY11f FY12f Turnover 1, , , , ,792.1 EBITDA PBT Net Profit EPS (sen) DPS (sen) Margin EBITDA (%) PBT (%) Net Profit (%) ROE (%) ROA (%) Balance Sheet Fixed Assets Current Assets Total Assets , , ,542.2 Current Liabilities Net Current Assets LT Liabilities Shareholders Funds Net Gearing (%) OSK Research See important disclosures at the end of this report 4

5 OSK Research Guide to Investment Ratings Buy: Share price may exceed 10% over the next 12 months Trading Buy: Share price may exceed 15% over the next 3 months, however longer-term outlook remains uncertain Neutral: Share price may fall within the range of +/- 10% over the next 12 months Take Profit: Target price has been attained. Look to accumulate at lower levels Sell: Share price may fall by more than 10% over the next 12 months Not Rated (NR): Stock is not within regular research coverage All research is based on material compiled from data considered to be reliable at the time of writing. However, information and opinions expressed will be subject to change at short notice, and no part of this report is to be construed as an offer or solicitation of an offer to transact any securities or financial instruments whether referred to herein or otherwise. We do not accept any liability directly or indirectly that may arise from investment decision-making based on this report. The company, its directors, officers, employees and/or connected persons may periodically hold an interest and/or underwriting commitments in the securities mentioned. Distribution in Singapore This research report produced by OSK Research Sdn Bhd is distributed in Singapore only to Institutional Investors, Expert Investors or Accredited Investors as defined in the Securities and Futures Act, CAP. 289 of Singapore. If you are not an Institutional Investor, Expert Investor or Accredited Investor, this research report is not intended for you and you should disregard this research report in its entirety. In respect of any matters arising from, or in connection with, this research report, you are to contact our Singapore Office, DMG & Partners Securities Pte Ltd ( DMG ). All Rights Reserved. No part of this publication may be used or re-produced without expressed permission from OSK Research. Published and printed by :- OSK RESEARCH SDN. BHD. ( V) (A wholly-owned subsidiary of OSK Investment Bank Berhad) Chris Eng Kuala Lumpur Hong Kong Singapore Jakarta Shanghai Malaysia Research Office OSK Research Sdn. Bhd. 6 th Floor, Plaza OSK Jalan Ampang Kuala Lumpur Malaysia Tel : +(60) Fax : +(60) Hong Kong Office OSK Securities Hong Kong Ltd. 12 th Floor, World-Wide House 19 Des Voeux Road Central, Hong Kong Tel : +(852) Fax : +(852) Singapore Office DMG & Partners Securities Pte. Ltd. 20 Raffles Place #22-01 Ocean Towers Singapore Tel : +(65) Fax : +(65) Jakarta Office PT OSK Nusadana Securities Indonesia Plaza Lippo, 14 th Floor, Jln. Jend. Sudirman Kav 25, Jakarta Indonesia Tel : +(6221) Fax : +(6221) Shanghai Office OSK (China) Investment Advisory Co. Ltd. Room 6506, Plaza 66 No.1266, West Nan Jing Road Shanghai China Tel : +(8621) Fax : +(8621) OSK Research See important disclosures at the end of this report 5

Strategic Perodua Acquisitions

UMW Holdings Bhd Price: Strategic Perodua Acquisitions Target Price: By Wan Mustaqim Bin Wan Ab Aziz l wanmustaqim@kenanga.com.my MARKET PERFORM RM5.95 RM6.25 In a surprise move, UMW has proposed to buy