qlg 101214 initiating-coverage

7/31/2019 QLG 101214 Initiating-Coverage

1/17

PP13693/04/2011(029398)

INVESTMENT RESEARCH

Initiating Coverage 14 December 2010

QL Resources(RM5.60 QLG MK)

BuyTarget Price: RM7.30

Making the most of ASEANs natural assets CONSUMER

Riding uptrend in demand for food commoditiesInitiate coverage on QL Resources (QL with a Buy recommendation andtarget price of RM7.30) based on 20x CY11 P/E. QLs products will benefitdirectly from the rising global demand and price trend for foodcommodities. The group is one of Asias largest surimi manufacturers anda Malaysian market leader in livestock feed trading, fishmeal and eggproduction.

Sustainable earnings growth

We have forecast a 3-year forward forecast EPS CAGR of 17.3% (FY11-13), that will be driven by strong demand for QLs marine, livestock feed,poultry products and palm oil, with rising population and disposableincome, as well as the groups steady capacity expansion. Diversificationreduces earnings volatility by smoothening out cyclicality of its resource-based activities.

Assertive regionalisation driveQLs expansion plan is both local and regional, with total group capex setto increase by 60% in the next 2 years to RM200m annually. The group isreplicating its business model in the ASEAN region with new poultry farmsin Tay Ninh, Vietnam and Cianjur, Indonesia; a new marine plant beingconstructed in Surabaya, Indonesia and further planting and palm oil millslated for its plantation in Tarakan, Kalimantan, Indonesia.

Benefits from government incentives for agricultureQL benefits from the governments pro-agriculture stance via taxincentives that translate to a lower tax rate (15% in FY10) and subsidiseddiesel for its deep sea fishing operations. The groups latest venture intorenewable energy is directly in accordance with the governmentspromotion of green technology as contained in the Budget 2011announcement.

Further upside to share priceDespite what seems like expensive valuations, we are bullish on QL as wefirmly believe it deserves premium valuation to peers as well as market.QLs next 2 years earnings CAGR of 16.1% is impressive as compared toMalaysian peers of 5.6%. Furthermore, over the last 10 years, QLs

average 12-month forward earnings growth is impressive at 23%. At ourtarget price, PEG ratio is undemanding at only 0.9x based on 10-yearaverage growth rate.

Financial summary

FYE 31 Mar 2009 2010 2011F 2012F 2013F

Revenue 1,397.9 1,476.4 1,597.5 1,820.4 2,025.4EBITDA 159.6 187.9 217.8 252.8 323.1Adj net profit 89.3 106.9 124.3 150.7 200.6

Adj EPS 21.7 27.3 31.5 38.1 50.8ECM / Consensus 99.9 101.0 106.6Adj EPS growth 11.0 25.6 15.2 21.2 33.1Adj P/E 25.8 20.5 17.8 14.7 11.0

Net DPS 7.0 7.5 8.0 8.5 9.0Net dividend yield 1.3 1.3 1.4 1.5 1.6

BVPS 1.02 1.29 1.53 1.83 2.26P/BV 5.5 4.4 3.7 3.1 2.5

Share Price Chart

Source: Bloomberg

3.03.54.04.55.05.56.06.5

De

c-09

Ja

n-10

Fe

b-10

Mar-10

Ap

r-10

Ma

y-10

Ju

n-10

J

ul-10

Au

g-10

Se

p-10

Oct-10

No

v-10

De

c-10

RM

-100102030405060

%

Shar e pr ic e ( lhs ) Relativ e perf (rhs)

Price PerformancePrice (RM) 5.6052-week Range (RM) 3.13 5.88Avg Daily Volume (000) 206,438

1M 3M 6MAbsolute (%) -3.1 22.3 50.9Relative (%) -2.9 19.3 29.8

Key DataMarket Cap (RM m) 2,213

Issued Shares (m) 395

Major Shareholders %

CBG Holdings Sdn Bhd 47.3

Farsathy Holdings Sdn Bhd 13.6

Balance Sheet Highlights (RM m)(@ 31.3.2011) (performance indicators annualised)

Total Assets 1,268.6Total Liabilities 607.3Total Debt (Gross) 381.4Shareholders Equity 597.8

Return on Assets (%) 9.8Return on Equity (%) 20.8Net Cash / Share (RM) n/a

Debt/Equity (x) 0.4Interest Cover (x) 11.9

Bernard [email protected]+603 2089 2985


2/17

2

INVESTMENT RESEARCH

Investment case

QL is now one of the largest surimi manufacturers in Asia and a Malaysian market leaderin livestock feed raw material distribution, fishmeal and egg production. Earnings growthwill come from all 3 business divisions, with key earnings growth catalyst being theIndonesian plantation.

Robust demand for QLs food supply-related products will be driven by growing Asianfood demand in tandem with rising population and disposable income. QL has grownearnings at a CAGR of 20.5% from FY01 to FY10, and has achieved uninterruptedearnings growth since FY88. Given its regional expansion and resilient, inflation-resistantbusiness, we anticipate a 3-year forward EPS CAGR of 17.2% (FY11-13) driven bycapacity expansion and firm prices for feed commodities, poultry, marine products andCPO.

Figure 1 : QLs share price performance vs. FBMKLCI (indexed)

50

100

150

200

250

300

Mar-09

May-09

Jul-09

Sep-09

Nov-09

Jan-10

Mar-10

May-10

Jul-10

Sep-10

Nov-10

Index Absolute Relative

Source: Bloomberg

QL is replicating its business models in the ASEAN region, with layer and breeder farmsin Cianjur, Indonesia, layer farm in Tay Ninh, Vietnam; surimi and fishmeal plants inSurabaya; and oil palm plantation and mill in Tarakan, Indonesia. By venturing intoneighbouring countries, QL leverages on its knowledge and skills to take advantage of thenatural resources available and tap on new markets.

Palm oil activities will be the key earnings growth catalyst when the Indonesian plantationmatures in FY12. While the POA segment only accounted for 18% of group revenue inFY10, we expect that it will increase to 26% in FY13.

Background

The group began modestly as a small family business distributing livestock feed, CBGHoldings, in 1984. QL Resources was incorporated in 1997, listed on Bursa MalaysiasSecond Board in 2000 and transferred to Main Board in 2002.

QL is 61%-owned by the Chia family via CBG Holdings and Farsathy Holdings. Themanagement team of QL is led by Mr Chia Song Kun, age 60, who is the managingdirector as well as one of QLs founding member. He is supported by 5 executive directorswho are members of the Chia family. Institutional investors make up c.21% of groupshareholdings.

QL largest surimi producer inAsia

Diversified play on fooddemand

Regional replication ofbusiness models

Indonesian palm oil plantationbegins to mature in FY12

Listed on Bursa in 2000

Chia family own 61% of QL


3/17

3

INVESTMENT RESEARCH

Figure 2 : Corporate structure

CBG Holdings Sdn Bhd47.37%

Farsathy Holdings Sdn Bhd13.60%

QL Resources Bhd

Integrated Livestock Farming-

QL Feedingstuffs Sdn Bhd

100%

Marine Products Manufacturing-

QL Fishery Sdn Bhd

100%

Palm Oil Activities-

QL Oil Sdn Bhd

100%

Source: Company

Business Activities

Vertically diversified range of agriculture-based businesses, broadly divided intoIntegrated Livestock Farming (ILF), Marine Products Manufacturing (MPM) and Palm OilActivities (POA). The ILF segment is the biggest revenue and pretax profit contributor.However, the marine division earns higher pretax profit margins (16% in FY10) comparedto ILF (9%).

Figure 3 : FY10 revenue and pretax profit, segmented by business divisions

FY10 Revenue

MPM

24%

POA

18%

ILF

58%

FY10 Pretax Profit

POA6%

ILF

53%

MPM

41%

Source: Company

Integrated Livestock Farming: Largest earnings contributor

The ILF division consists of livestock feed raw materials trading and poultry farming. Thetrading segment contributed 63% of QLs FY10 ILF revenue and the remaining 37% camefrom the farming segment. QLs trading arm imports grains and protein meal fromcountries like Argentina, US and India, as part of a consortium of local companiesincluding Gold Coin Feedmills and KFC Holdings. QL then distributes the feedcommodities to local users of animal feed raw materials and earns a profit margin of 4-

5%. The group distributed 550,000 mt of feed-related soft commodities in FY10 thatrepresents approximately 18% of the Malaysian market.

Integrated Livestock Farming isbiggest earnings contributor

but Marine ProductManufacturing is the mostprofitable

QL distributes 18% ofMalaysias livestock feedcommodities


4/17

4

INVESTMENT RESEARCH

Figure 4 : Segmental ILF revenue (FY10)

Trading

62%

Farming

38%

Source: Company

Key feed commodity prices- maize and soybean meal- rose in CY10 in tandem with highwheat prices resulting from drought-ridden Russias halt on exports. We expect furtheruptrend in CY11 wheat price due to excessive year-end rainfall in Australia and Europe.Maize price is expected to increase as well because stocks of yellow maize have fallen tolows last seen in 2008. Higher soybean meal price in CY11 will be driven by increase inlivestock farming activities to fulfil the global demand for meat.

Figure 5 : Historical prices of maize, soybean meal (Apr 2004- Nov 2010)

-

50

100

150

200

250

300

350

400

450

500

Apr-04

Jul-04

Oct-04

Jan-05

Apr-05

Jul-05

Oct-05

Jan-06

Apr-06

Jul-06

Oct-06

Jan-07

Apr-07

Jul-07

Oct-07

Jan-08

Apr-08

Jul-08

Oct-08

Jan-09

Apr-09

Jul-09

Oct-09

Jan-10

Apr-10

Jul-10

Oct-10

US$/mt

Maize Soybean meal

Source: International Monetary Fund (IMF)

ILF farming operations comprises 5 layer farms and 1 broiler farm, spread out acrossPeninsula and East Malaysia. QL is one of the largest layer farming outfits in the countrywith FY10 output of 913m eggs that accounts for c.10% of Malaysian market share. Thegroup also produced 10m day-old chicks and 7m broilers in FY10.

Figure 6 : ILF production

No. Plant location Activities1 Kulim, Kedah Layer farming2 Rawang, Selangor Layer farming3 Nilai, Negeri Sembilan Layer farming

4 Kota Kinabalu, Sabah Layer farming5 Papar, Sabah Broiler production6 Kuching, Sarawak Layer farming

Source: Company

Trading of feed grains & proteinmeal makes up the bulk of ILFrevenue

Rising price trend of wheat &maize in CY10 to continue intoCY11

QL is one of the largest eggproducers in the country with10% market share


5/17

5

INVESTMENT RESEARCH

QLs poultry products generally enjoy resilient demand as demonstrated by the eggconsumption in Peninsula Malaysia that has increased by a CAGR of 4% over the past 10years. The demand for eggs is fairly inelastic as it is a basic food item and one of thecheapest sources of protein available.

Figure 7 : Egg output in Peninsula Malaysia (CY95-CY10F)

5.0

5.5

6.0

6.5

7.0

7.5

8.0

8.5

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010F

bn

Source: Federation of Livestock Farmers Associations of Malaysia (FLFAM)

QL earns 0.5-1.0 sen more profit per egg compared to its competitors because of costsavings from importing its own feed. Generally, QL makes a profit margin of 2-3 sen peregg with average selling price of 23.0 sen per egg. The price of eggs in Malaysia hasrisen gradually, as shown below.

Figure 8 : Historical ex-Farm price of eggs (May 2004-Nov 2010)

10

12

1416

18

20

22

24

26

28

30

Apr-04

Jul-04

Oct-04

Jan-05

Apr-05

Jul-05

Oct-05

Jan-06

Apr-06

Jul-06

Oct-06

Jan-07

Apr-07

Jul-07

Oct-07

Jan-08

Apr-08

Jul-08

Oct-08

Jan-09

Apr-09

Jul-09

Oct-09

Jan-10

Apr-10

Jul-10

Oct-10

Sen

Avg=22.6

Source: Federation of Livestock Farmers Associations of Malaysia (FLFAM)

Regional expansion to Vietnam and Indonesia will add 60% to the groups total eggproduction upon completion by end-FY12. Construction began on a Vietnam layer farm inMay 2010 and an Indonesian layer and breeder farm in August.

Steady domestic demand foreggs

By importing its own feed,QL earns 0.5-1.0 sen moreprofit per egg than its rivals


6/17

6

INVESTMENT RESEARCH

Figure 9 : Upcoming poultry farms

No. Plant location Activities Annual Capacity Capex Begins ops

1 Tay Ninh, Ho Chi Minh,Vietnam

Layer farming 180m eggs US$10m (RM31.5m) 4QFY12

2 Cianjur, Indonesia Layer farming 180m eggs US$20m (RM69.2m) 4QFY12Breeder farm 12m day old chicks

Source: Company

Further growth via acquisitions is likely as illustrated by QLs move to buy a 23.29% stakein Lay Hong for RM11.6m in August 2010. The acquisition price of RM1.05 per sharerepresents an undemanding 4.7x FY10 P/E and 52% of RM2.00 NTA per share. Bybuying into Lay Hong, QL intends to improve its supply chain network and enablescheaper raw material procurement via economies of scale.

Marine Products Manufacturing: Most profitable division

QL is the largest surimi manufacturer in Asia and Malaysias largest fishmeal producer. ItsMPM operations comprise 9 plants that generated 25,000 mt surimi, 19,000 mt surimi-based products, 26,000 mt fishmeal and 20,000 mt of other seafood products in FY10.The marine plants are located in major fishing towns to ensure fresh supply of rawmaterials.

Figure 10 : MPM production

No. Plant location Activities1 Hutan Melintang, Perak Surimi, surimi-based products2 Hutan Melintang, Perak Fishmeal

3 Hutan Melintang, Perak Deep-sea fishing4 Endau, Johor Surimi, deep sea fishing5 Endau, Johor Fishmeal6 Johor Bahru, Johor Frozen seafood7 Kota Kinabalu, Sabah Surimi, deep sea fishing8 Kota Kinabalu, Sabah Fishmeal9 Singapore Surimi, surimi-based products

Source: Company

The biggest contributors to MPM revenue are surimi and surimi-based products (70% ofFY10 MPM revenue), followed by fishmeal (22%). QL also has a small frozen seafooddivision (


7/17

7

INVESTMENT RESEARCH

Surimi is a paste made from white-fleshed fish that has been rinsed and pulverized. Thepaste is frozen in blocks and is used to make end-products such as fish cakes andcrabsticks. Approximately 50% of QLs surimi output is exported to key markets of Japan,Korea, Singapore, China and Taiwan.

The company also manufactures downstream surimi-based products for the local marketto counter volatility in surimi prices. The chilled and frozen products such as seafood tofuand fish balls are sold under the brand names Ocean Ria, Mushroom and Figo.

Figure 12 : Surimi production process

Source: Company

Surimi prices have been steadily recovering in CY10 due to tightening global whitefishsupplies (with Alaska Bering Sea Pollock quota cut in CY10). The price of surimi hasincreased by approximately 16% y-o-y in FY10. This is encouraging after the steepdecline in 1HCY09 that was caused by the economic crisis curtailing Japanese demandfor surimi products and moderation from the spike in 1HFY09 as a result of elevated oilprice.

25% of Malaysias fishmeal output comes from QLs 4 plants (26,000 mt). 90% of QLsfishmeal production is exported to the likes of China and Indonesia. Fishmeal processingentails cooking, drying and grinding the waste from surimi production- head, bones andskin of the fish- into a nutrient-rich ingredient used in aquaculture and livestock feed.

Fishmeal price in FY10 has came off by 15% since the record high of US$1,961/mt in

April 2010 as a result reduced demand from Chinas aquaculture industry that has beennegatively impacted by severe flooding this year. The decline in fishmeal price alsorepresents a moderation from the surge in April 2010 caused by supply shortages fromthe Chilean earthquake in February 2010.

Half of QLs surimi is exported

Surimi-based products fordomestic market help counterfluctuations in surimi price

Surimi prices recovering inCY10 due to tight fish supplies

QL makes 25% of Malaysiasfishmeal

Global fishmeal prices heavilyreliant on China aquacultureindustry


8/17

8

INVESTMENT RESEARCH

Figure 13 : Price of Peru Fishmeal pellets 65% protein CIF (Apr 2004- Nov 2010)

-

500

1,000

1,500

2,000

2,500

Apr-04

Oct-0

4

Apr-05

Oct-0

5

Apr-06

Oct-0

6

Apr-07

Oct-0

7

Apr-08

Oct-0

8

Apr-09

Oct-0

9

Apr-10

Oct-1

0

US$/mt

Source: International Monetary Fund (IMF)

Having Malaysia as its marine base presents QL with the competitive advantages ofsubsidised diesel for its deep sea fishing activities, plentiful supply of fish (with theabsence of national fishing quotas) and tax incentives for its fishing vessels.Approximately 5% of QLs total fish requirements are supplied by its own 23 fishing fleet,based in Hutan Melintang, Perak and Sepangar Bay, Sabah.

QL is not resting on its laurels however and is seeking further growth opportunities inIndonesia. The group is building a marine plant on a 10-hectare piece of land in Surabayathat is due for completion by end-FY11. Phase 1 of the plant will cost USD10m(RM31.5m) and will increase QLs marine production capacity by 20% (5,000 mt surimiand 5,000 mt fishmeal). We anticipate that the Surabaya plant will begin to make positiveearnings contribution in FY12.

Palm Oil Activities: Gaining prominence

QLs POA division consists of 2 palm oil plantations in Tawau, Sabah and Tarakan,Kalimantan, Indonesia, and 2 CPO mills in Kunak and Tawau, Sabah. Its 1,200 hectaremature oil palm plantation in Sabah produces 30,000 mt FFB per year. QL supplementsits own FFB harvest with that of third parties to supply its 2 CPO mills that are capable ofprocessing a total of 500,000 mt FFB per year. The mills produced 110,000 mt CPO inFY10 and run at an average 70% utilisation rate.

Figure 14 : POA Production

No. Plant location Activities1 Kunak, Sabah CPO mill2 Tawau, Sabah CPO mill3 Tawau, Sabah Oil palm plantation- 1,200 hectares4 Tarakan, Indonesian Oil palm plantation- 20,000 hectares

Source: Company

CPO price has been trending upwards in CY10 supported by weaker Malaysianproduction in early-CY10 and strong exports, soybean shortage due to strong demandfrom China and unfavourable weather conditions negatively impacting South Americansoybean crops.

Malaysia offers cheaper fuel,abundant fish supplies & taxincentives for deep sea fishing

Surabaya marine plant to add20% capacity by FY12

2 CPO mills in Sabah, 2plantations in Sabah &Indonesia


9/17

9

INVESTMENT RESEARCH

Figure 15 : Price of CPO (Apr 2004- Nov 2010)

-

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

Apr-04

Jul-0

4

Oct-0

4

Jan-0

5

Apr-05

Jul-0

5

Oct-0

5

Jan-0

6

Apr-06

Jul-0

6

Oct-0

6

Jan-0

7

Apr-07

Jul-0

7

Oct-0

7

Jan-0

8

Apr-08

Jul-0

8

Oct-0

8

Jan-0

9

Apr-09

Jul-0

9

Oct-0

9

Jan-1

0

Apr-10

Jul-1

0

Oct-1

0

RM/mt

Source: Malaysian Palm Oil Board (MPOB)

The biggest catalyst for QLs POA division will be the 20,000 hectare Indonesianplantation once it reaches maturity. QLs 75% stake in the Indonesian plantation isexpected to deliver positive earnings contribution in FY12 once the trees begin to bearfruit but expect significant contribution in FY13. Currently 8,000 hectares have beenplanted to-date with internal target of 15,000 hectares to be reached by end-FY13. A CPOmill is also being constructed on the Indonesian site that will have a total annual capacityof 90,000 mt when it is completed by end-CY11.

QL is also venturing into renewable energy with construction of zero-waste palm oil milland acquisition of a 40.5% stake in Boilermech Sdn Bhd. Under the zero-waste palm oilmill, QL is setting up a palm biomass pelletization plant that will use its proprietary systemto produce palm pellets from empty fruit bunches (EFB) for industrial steam and powergeneration and palm oil mill effluent (POME) biogas power plant that will generate powerto fuel the pelletization plant. The plants are slated to begin operations in December 2010and will be located at QLs CPO mill in Tawau, Sabah. The pelletization plant will have aproduction capacity of 40,000 mt per year and will cost QL RM10m capex. The palm oilpellets target export markets of Japan, Korea and the EU where there is a ready marketfor wood biomass pellets that are mainly used in domestic central heating furnaces. Thekey advantage that palm pellets have over wood pellets are long-term sustainability of rawmaterial supply with an estimated dried EFB supply of 7-8m mt per year in Malaysiaalone.

QL acquired a 40.51% stake in Boilermech Sdn Bhd (BSB) by QL in October 2010. BSB

designs, manufactures and installs biomass boilers mainly for the palm oil industry. Theacquisition price of RM29.2m represents a FY10 P/E of 5.9x. QLs investment in BSBcomplements its renewable energy business and provides access to the burgeoningmarkets of Thailand, Myanmar and Cambodia that BSB has a presence in. Havingacquired the 40.51% stake in BSB, QLs wholly owned subsidiary QL Green ResourcesSdn Bhd subsequently undertook a share swap with BHB for its 40.51% interest in BSB inexchange for 40.51% in BHB. The purpose of the restructuring is to facilitate the listing ofBHB that will enable the company to raise funds for future expansion.

Strong CPO price in CY10

Indonesian plantation to beginearnings contribution in FY12

Patented palm pellets & POMEbiogas power plants to befuture catalysts

Acquisition & future listing of

Boilermech ties in with QLsrenewable energy business


10/17

10

INVESTMENT RESEARCH

Risks

Economic slowdown may reduce demand for QLs products. However, given that theseare largely staple food-based products, we believe that the fall in demand would beminimal as compared to discretionary consumer products. Historically, QLs earningshave proven to be resilient in the face of challenging economic conditions, as shownbelow. In FY11, global supply issues have thus far supported the robust prices for feedgrains, fish products and palm oil.

Figure 16 : Resilient revenue, PBT and PAT (FY88-FY10)

0

200

400

600

800

10001200

1400

1600

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

Revenue (RMm)

0

20

40

60

80

100120

140

160

PBT/PAT (RMm)

Turnover PBT PAT

97/98 Asian

financial crisis

2011

Sept 11

2002/2003

SARS

2006/2008 Oil

price hike

2008/2009

Global downturn

Source: Company

A stronger Ringgit would have a slightly negative impact on QL as its MPM business isexport-dependent with approximately 60% of sales denominated in foreign currencies(mainly USD). However, QLs ILF business would benefit from a stronger Ringgit as thetrading division imports large quantities of livestock feed ingredients that are denominatedin USD.

Bio-security threat from disease outbreak such as Avian flu would endanger its poultryfarming operations and negatively impact demand for its livestock feed ingredients. Thegroup has minimised its direct risk by using the closed housed system on its poultry farmsthat prevents contact with potentially infected wild birds; and spacing out its farmsgeographically. Ironically, the last outbreak of avian flu was positive for QL as the lowersupply of eggs nationwide drove prices up and reduced competition by forcing smallerplayers to consolidate.

QL is exposed to fluctuation in maize and soybean meal prices. While QL is generallyable to pass on costs to its customers, there will be a time lag of 1-2 months and profitmargin compression during that time. However, by importing feed ingredients directly,QLs farming segment benefits from lower operating costs. Generally, QLs cost ofproduction per egg is 2-3 sen lower than its competitors.

Economic slowdown wouldnegatively impact demand butQLs earnings resilient

Risk from forex translation as60% of sales are in foreigncurrencies

Health scares would negativelyimpact demand for poultryproducts

Fluctuation in maize & soybeanmeal prices would adverselyaffect ILF trading margins


11/17

11

INVESTMENT RESEARCH

Financials

QLs revenue has increased by a 10-year CAGR (FY01-10) of 12.0%. Topline growth hasbeen supported by steady, sustainable capacity expansion particularly in the ILF andMPM divisions, as well as strong price fundamentals for surimi, fishmeal, CPO, feedcommodities and eggs.

Net profit has grown by a 10-year historical CAGR (FY01-10) of 20.5% with net profitmargin having more than doubled to 7.2% in FY10 from 3.5% in FY01. QLs earningshave grown steadily without a single dip since 1988 thanks to robust demand and strongunderlying prices for the groups food supply-related products, as well as its efficient,vertically diversified operations.

Figure 17 : Historical net profit (FY01-FY10)

-

20

40

60

80

100

120

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

RMm

0%

1%

2%

3%

4%

5%

6%

7%

8%

Net profit Net profit margin

Source: Company

We anticipate 3-year forward (FY11-13) earnings growth of 16-33% and EPS CAGR of17% over the same period. We expect topline to be buoyed by robust demand for QLspoultry, marine and palm oil products in tandem with the rising global food demand, aswell as strong prices for food commodities such as livestock grains, surimi and fishmealdue to tightening supply as a result of weather conditions. Earnings momentum will gatherspeed in FY13 and the groups net profit margin is expected to improve to 10% (from 8%in FY11) as the Indonesian plantation matures and begins to make material earningscontribution and regional expansion (Tay Ninh and Cianjur poultry farms, as well asSurabaya marine plant) begins to bear fruit.

Revenue 10-year CAGR growthof 12.0%

Uninterrupted net profit growthfor 22 years

Earnings momentum to pick upin FY13 once Indonesianplantation matures & regionalexpansion bears fruit


12/17

12

INVESTMENT RESEARCH

Figure 18 : Segmental EBIT (FY04-FY13E)

-

50

100

150

200

250

300

2004 2005 2006 2007 2008 2009 2010 2011F 2012F 2013F

RMm MPM POA ILF

41%

23%31%

46%20%

38%

44%

13%

43%

47%

11%

42%

53%

10%

37%

50%

10%

39%

52%

7%

41%

58%

6%

36%

56%

9%

35%

45%

29%

26%

Source: Company

Net gearing level of 0.6x (at end-June 2010) is not cause for concern and does notindicate high operational risk as the bulk of QLs debt consists of short term bankersacceptances for its livestock feed trading activities. Short term debt accounts for 48% ofthe RM401.4m total borrowings. Excluding short term debt, QLs net gearing level woulddecrease to 0.3x, well within the internal comfort level of 0.5x. The group has budgetedcapex of RM200m per year in FY11 and FY12.

As capex is expected to outpace free cash flow generation, QL is carrying a severalcorporate exercises to raise funds and improve the liquidity of its share. These are: (1)private placement of up to 20.9m shares, or 5.3% of existing share capital, (2) a 1-to-2share split, and (3) issuance of 41.6m free warrants on a 1-for-20 basis. QL announcedon 30 November 2010 that Bursa Malaysia has approved its corporate proposals that aredue to be completed by 1QCY11.

The private placement would raise c.RM104.1m (based on RM5.00 placement shareprice), of which QL intends to spend 70% on ILF and POA capex while the remaining 30%would be used for working capital and cost of the corporate exercises. ILF capex includesraising capacity of existing farms, and the construction of poultry farms in Vietnam andIndonesia. As for POA, QL will use the funds for the development of its Indonesianplantation, construction of a CPO mill on the site and to finance its downstream renewableenergy projects. The overall impact of the exercise is positive as it will raise funds for QLsexpansion and lower net gearing.

Net gearing of 0.6x mainly dueto trade finance for ILF tradingactivities

Private placement, 1-to-2 share

split & free warrants by 1QCY11

Placement proceeds to be usedfor ILF & POA


13/17

13

INVESTMENT RESEARCH

Valuation and recommendation

We initiate coverage on QL with a BUY call and target price of RM7.30, which is based on20x P/E CY11 earnings. Our key FY12 assumptions are (1) revenue growth of 9.7% forMPM, 26.7% for POA and 11.0% for ILF and (2) EBIT margin of 15.2% for MPM, 4.1% forPOA and 11.1% for ILF. Upon completion of private placement and share split, our targetprice would be adjusted to RM3.46.

There are no direct comparables for QL. As such, we have compiled comparativevaluations for its regional peers in each line of business. At current price, QL is trading atCY11 15.4x P/E which is at premium to peer average for ILF and POA of 11.4x but atdiscount to peer average for POA of 16.5x. When compared to average P/E of 11x forselected Malaysian consumer stocks, QL is also trading at a premium. Against historicalaverage P/E, QL seems expensive as it is trading above 10-year average P/E of 9.1x aswell as 2x standard deviation of 12.5x.

Despite what seems like expensive valuations, we are bullish on QL as we firmly believe itdeserves premium valuation to peers as well as market. QLs next 3 years earningsCAGR of 16.1% is impressive as compared to Malaysian peers of 5.6%. Furthermore,

over the last 10 years, QLs average 12-month forward earnings growth is impressive at23%. At our target price, PEG ratio is undemanding at only 0.9x based on 10-yearaverage growth rate.

We expect the group to maintain an informal dividend payout ratio of 25-30%. It is unlikelythat the group will raise its dividend payout anytime soon as it is still in expansionarymode and has annual capex demand of RM200m for the next 2 years. At current shareprice, we anticipate net dividend yields of 1.4% in FY11 and 1.5% in FY12.

Figure 19 : Peer comparison- Integrated Livestock Farming (Global)

Company Ticker Curr FYE Share Price Mkt Cap P/E (x) Div. Yield (%) ROE (%)13 Dec (m) CY11F CY12F CY11F CY12F CY11F CY12F

QL Resources QLG MK MYR Mar 5.60 2,213.0 15.4 11.8 1.5 1.6 21.0 22.3

Cal-Maine Foods Inc CALM US USD May 32.97 786.4 12.0 n.a. 2.8 n.a. n.a. n.a.CCK Consolidated CCK MK MYR June 7.95 9,967.9 7.6 6.6 4.1 5.3 22.3 21.3GFPT PCL GFPT TB THB Dec 7.59 1,626.4 13.4 10.8 - n.a. 10.0 13.0Pilgrims Pride PPC US USD Dec 43.56 990.5 12.7 n.a. 1.5 n.a. 7.9 n.a.Sanderson Farm Inc SAFM US USD Oct 43.56 990.5 12.7 n.a. 1.5 n.a. 7.9 n.a.Average 11.4 8.7 2.1 5.3 13.4 17.2

Source: Bloomberg, ECM Libra

Figure 20 : Peer comparison- Marine Products Manufacturing (Asia)

Company Ticker Curr FYE Share Price Mkt Cap P/E (x) Div. Yield (%) ROE (%)13 Dec (m) CY11F CY12F CY11F CY12F CY11F CY12F


Charoen Pokphand CPF TB THB Dec 23.80 178,974.5 11.5 10.5 4.5 5.0 22.9 22.6China Fishery CFG SP SGD Sept 2.18 2,185.3 13.3 12.4 2.5 2.7 21.6 20.3Guangdong Haid Group 002311 CH CNY Dec 33.55 9,769.8 32.9 25.6 1.2 1.4 11.9 13.7Nippon Suisan Kaisha 1332 JP JPY Mar 254.00 70,411.4 17.2 12.2 3.9 3.9 7.5 9.6Olam Int Ltd OLAM SP SGD June 3.14 6,673.2 19.0 15.4 1.6 2.0 17.5 18.7Seafresh Industry PCL CFRESH TB THB Dec 4.74 2,104.3 9.5 n.a. 9.5 15.1 n.a.Shandong Homey 600467 CH CNY Dec 13.98 8,857.7 - 34.8 - 1.0 - 13.2Synear Food Hldgs SYNF SP SGD Dec 54.25 51,880.9 11.4 10.0 2.8 2.7 19.2 19.2Thai Union Frozen TUF TB THB Dec 1845.00 204,575.5 12.0 11.6 2.2 2.2 9.2 8.7Toyo Suisan Kaisha 2875 JP JPY Mar 44.61 20,181.6 38.2 28.2 22.4 23.7Zhangzidao 002069 CH CNY Dec 44.61 20,181.6 38.2 28.2 n.a. n.a. 22.4 23.7

Average 16.5 17.9 3.1 2.6 14.7 16.6


RM7.30 target price based on20x CY11 P/E

At premium to peers

but deserves premiumvaluation for average earningsgrowth of 23% over last 10

years

25-30% informal dividendpayout ratio


14/17

14

INVESTMENT RESEARCH

Figure 21 : Peer comparison- Palm Oil Activities (Malaysia)

Company Ticker Curr FYE Share Price Mkt Cap P/E (x) Div. Yield (%) ROE (%)

13 Dec (m) CY11F CY12F CY11F CY12F CY11F CY12F


Hap Seng Plantations HAPL MK MYR Dec 3.13 2,504.0 12.3 11.8 5.4 5.6 11.6 11.3IJM Plantation IJMP MK MYR Mar 2.97 2,380.0 16.3 15.5 2.5 2.7 10.4 10.9Kim Loong Resources KIML MK MYR Jan 2.57 784.4 9.2 8.4 4.7 4.7 18.5 17.1TH Plantations THP MK MYR Dec 1.61 785.4 9.2 8.5 5.5 6.0 17.1 16.7TSH Resources TSH MK MYR Dec 2.53 1,048.8 11.0 9.4 2.1 2.3 11.5 11.9United Plantations UPL MK MYR Dec 17.52 3,646.5 10.5 9.8 4.7 5.5 18.1 17.8Average 11.4 10.6 4.2 4.5 14.5 14.3


Figure 22 : Peer comparison- Food and Beverage (Malaysia)

Company Ticker Curr FYE Share Price Mkt Cap P/E (x) Div. Yield (%) ROE (%) 2-yr EPS13 Dec (m) CY11F CY12F CY11F CY12F CY11F CY12F CAGR

QL Resources QLG MK MYR Mar 5.60 2,213.0 15.4 11.8 1.5 1.6 21.0 22.3 16.1

C.I. Hldgs CIH MK MYR June 3.70 525.4 11.5 10.4 3.4 3.4 29.4 36.5 8.2Cocoaland Hldgs COLA MK MYR Dec 2.32 398.1 10.4 9.2 4.5 4.9 19.6 19.8 20.7Mamee MAMEE MK MYR Dec 3.43 519.1 9.4 8.3 5.2 6.0 20.4 21.4 9.1Nestle (M) NESZ MK MYR Dec 43.30 10,153.8 22.2 21.3 4.3 4.9 64.1 56.4 3.2Average 13.4 12.3 4.4 4.8 33.4 33.5 5.6


Figure 23 : Impact of corporate exercises on share capital, target price

Par value No. ofshares

EPS (Sen) SharePrice

Target Price

(RM) (m) FY11 FY12 (RM) (RM)

Current 0.50 395.2 31.5 38.1 5.60 7.30After private placement 0.50 416.0 29.9 36.2 - -After share split 0.25 832.0 14.9 18.1 2.80 3.46After free warrants(Assume fully-exercised)

0.25 873.6 14.2 17.3 - -

Source: Company, ECM Libra


15/17

15

INVESTMENT RESEARCH

Figure 24 : 1-year rolling forward P/E trend

5

7

9

11

13

15

17

Mar-

00

Mar-

01

Mar-

02

Mar-

03

Mar-

04

Mar-

05

Mar-

06

Mar-

07

Mar-

08

Mar-

09

Mar-

10

P/E (x) P/E Average P/E


Figure 25 : 12-month forward earnings growth

-

5

10

15

20

25

30

35

40

45

50

Mar-01

Sep-01

Mar-02

Sep-02

Mar-03

Sep-03

Mar-04

Sep-04

Mar-05

Sep-05

Mar-06

Sep-06

Mar-07

Sep-07

Mar-08

Sep-08

Mar-09

Sep-09

Mar-10

Sep-10

Mar-11

Sep-11

Mar-12

%

12-mth fwd earnings growth Average


Average @ 23%

+2 SD @ 12.5x

+1SD @ 10.8x

Average @ 9.1x

-1 SD @ 7.4x

-2 SD @ 5.7x


16/17

16

INVESTMENT RESEARCH

QL RESOURCES BHD FINANCIAL SUMMARY

Balance Sheet Income Statement

FY 31 Mar (RM m) 2009A 2010A 2011F 2012F 2013F FY 31 Mar (RM m) 2009A 2010A 2011F 2012F 2013F

PPE 416.4 481.4 611.2 730.5 810.9 Revenue 1,397.9 1,476.4 1,597.5 1,820.4 2,025.4Biological assets 68.7 92.1 106.6 122.1 138.1 EBITDA 159.6 187.9 217.8 252.8 323.1

Prepaid lease payments 94.2 97.0 97.0 97.0 97.0 Depreciation & amortisation (34.2) (39.4) (52.0) (62.6) (71.4)

Inventories 128.0 131.5 166.3 189.5 210.9 Net interest expense (16.0) (12.9) (13.1) (11.8) (11.1)

Receivables 154.0 174.8 183.8 209.5 233.1 Share of associates 0.4 0.5 2.6 9.8 9.9

Other assets 23.9 23.1 23.1 23.1 23.1 Pretax profit 109.9 136.0 155.3 188.2 250.6

Deposit, bank and cash 68.3 106.1 80.5 89.1 145.2 Taxation (13.2) (20.9) (23.3) (28.2) (37.6)

Total Assets 953.5 1,106.1 1,268.6 1,460.9 1,658.3 Minority interest (7.3) (8.2) (7.7) (9.3) (12.4)

Net profit 89.3 106.9 124.3 150.7 200.6

LT borrowings 163.1 215.4 254.9 272.2 253.4 Adj net profit 89.3 106.9 124.3 150.7 200.6

ST borrowings 215.5 196.9 216.5 250.3 275.2

Payables 77.5 91.2 91.9 104.7 116.5 Key Statistics & Ratios

Other liabilities 32.2 44.0 44.0 44.0 44.0 FY 31 Mar (RM m) 2009A 2010A 2011F 2012F 2013F

Liabilities 488.2 547.5 607.3 671.2 689.1

Growth

Share capital 165.0 197.6 197.6 197.6 197.6 Revenue 7.0% 5.6% 8.2% 14.0% 11.3%

Reserves 252.9 305.2 400.2 519.3 686.4 EBITDA 15.7% 17.7% 15.9% 16.1% 27.8%

Shareholders' equity 417.9 502.8 597.8 716.9 884.0 Pretax profit 14.7% 23.8% 14.2% 21.2% 33.1%

Minority interest 47.4 55.8 63.5 72.8 85.1 Net profit 10.6% 19.7% 16.3% 21.2% 33.1%

Total Equity 465.4 558.6 661.3 789.7 969.1 Adj EPS 11.0% 25.6% 15.2% 21.2% 33.1%

Total Equity and Liabi li ties 953.5 1,106.1 1,268.6 1,460.9 1,658.3 Profitability

EBITDA margin 11.4% 12.7% 13.6% 13.9% 16.0%

Net profit margin 6.4% 7.2% 7.8% 8.3% 9.9%

Cash Flow Statement Effective tax rate 12.0% 15.4% 15.0% 15.0% 15.0%

FY 31 Mar (RM m) 2009A 2010A 2011F 2012F 2013F Return on assets 9.4% 9.7% 9.8% 10.3% 12.1%

Return on equity 21.4% 21.3% 20.8% 21.0% 22.7%

Pretax profit 109.9 136.0 155.3 188.2 250.6

Depreciation & amortisation 34.2 39.4 52.0 62.6 71.4 Leverage

Change in working capital (64.5) (2.7) (43.1) (36.0) (33.1) Total debt / total assets (x) 0.30 0.25 0.20 0.16 0.13

Net interest received / (paid) (7.6) (3.1) (13.1) (11.8) (11.1) Total debt / equity (x) 0.64 0.50 0.37 0.28 0.21

Tax paid (11.9) (13.9) (23.3) (28.2) (37.6) Net debt / equity (x) 0.65 0.60 0.43 0.25 0.10

Others 24.2 13.2 11.2 10.0 9.3

Operating Cash Flow 84.3 168.9 139.0 184.7 249.5 Key DriversFY 31 Mar (RM m) 2009A 2010A 2011F 2012F 2013F

Capex (88.2) (109.1) (180.0) (180.0) (150.0)

Others (41.7) (20.2) (14.4) (15.6) (16.0) ILF

Investing Cash Flow (129.9) (129.3) (194.4) (195.6) (166.0) Maize price (RM/mt) 796 624 643 675 708

Soybean meal price (RM/mt) 1,278 1,285 1,090 1,123 1,157

Issuance of shares - - - - - Egg price (Sen) 23.9 22.7 24.3 24.8 25.3

Changes in borrowings 104.4 32.4 59.0 51.1 6.1

Dividend paid (24.0) (25.3) (29.3) (31.6) (33.6) MPM

Others (1.6) (8.9) - - - Surimi price (RM/mt) 8,728 6,112 6,173 6,667 6,800

Financing Cash Flow 78.8 (1.8) 29.7 19.5 (27.4) Fishmeal price (RM/mt) 3,916 4,938 4,963 5,013 5,113

Net cash flow 33.2 37.9 (25.7) 8.7 56.0 POA

Forex - - - - - CPO price (RM/mt) 2,458 2,373 2,500 2,700 2,700

Beginning cash 35.1 68.3 106.1 80.5 89.1

Ending cash 68.3 106.1 80.5 89.1 145.2 Valuation

FY 31 Mar (RM m) 2009A 2010A 2011F 2012F 2013F

EPS (sen) 21.7 27.3 31.5 38.1 50.8

Adj EPS (Sen) 21.7 27.3 31.5 38.1 50.8

P/E (x) 25.8 20.5 17.8 14.7 11.0

EV/EBITDA (x) 11.8 10.1 7.7 7.1 6.5

Net DPS (sen) 7.0 7.5 8.0 8.5 9.0

Net dividend yield 1.3% 1.3% 1.4% 1.5% 1.6%

BV per share (RM) 1.02 1.29 1.53 1.83 2.26

P/BV(x) 5.5 4.4 3.7 3.1 2.5

Price Date: 13 December 2010


17/17

17

INVESTMENT RESEARCH

Key to stock recommendations: Key to sector recommendations:

Buy = Share price is expected to appreciate by >10% over the next 12 months Overweight = Industry expected to outperform the market over the next 12 months

Hold = Share price is expected to move by less than +/-10% over the next 12 months Neutral = Industry expected to perform in-line with the market over the next 12 months

Sell = Share price is expected to decline by >10% over the next 12 months Underweight = Industry expected to underperform the market over the next 12 months

This report is for information purposes only and general in nature. The information contained in this report is based on data and obtained from sources believed to be reliable. However, thedata and/or sources have not been independently verified and as such, no representation, express or implied, is made with respect to the accuracy, completeness or reliability of theinformation or opinions in this report. Accordingly, neither we nor any of our related companies and associates nor persons related to us accept any liability whatsoever for any direct, indirector consequential losses (including loss of profits) or damages that may arise from the use of or reliance on the information or opinions in this publication. Any information, opinions orrecommendations contained herein are subject to change at any time without prior notice.

It is not possible to have regard to the specific investment objectives, the financial situation and the particular needs of each person who may receive or read this report. As such, investorsshould seek financial, legal and other advice regarding the appropriateness of investing in any securities or the investment strategies discussed or recommended in this report.

Under no circumstances should this report be considered as an offer to sell or a solicitation of an offer to buy any securities referred to herein. This company and its related companies, theirassociates, directors, connected parties and/or employees may, from time to time, own, have positions or be materially interested in any securities mentioned herein or any securities relatedthereto, and may further deal with such securities and provide advisory, investment or other services for any company or entity mentioned in this report. In reviewing this report, investorsshould be aware that any or all of the foregoing, among other things, may give rise to real or potential conflict of interests.

Published & printed by:

ECM Libra Capital Sdn Bhd (579116-A)

2nd Floor, West Wing, Bangunan ECM LibraNo. 8 Jalan Damansara Endah

Damansara Heights50490 Kuala LumpurTel: (603) 2089 1888Fax: (603) 2096 1868

qlg 101214 initiating-coverage

Documents