QL Resources Bhd
(July 8, RM4.05)
Maintain outperform at RM4.05 with higher fair value of RM4.90 (from RM4.60): Indonesia plantation earnings to start contributing by FY11. QL’s 74.5%-owned plantation is expected to start contributing more meaningfully to the plantation division (more than 60% of plantation earnings) by FY13 arising from the maturing age profile of its plants and additional milling profits from the operation of its crude palm oil (CPO) mill in Indonesia (third CPO mill for the group), which is expected to be completed by December 2011.
Currently producing 2.5 million eggs per day, QL targets to increase egg production four million eggs per day (+60%) by FY13. This will come from its expansion plans in Malaysia (+500,000, or +20%, in FY11), Indonesia (+500,000, +20%, in FY12) and Vietnam (+500,000, +20%, by end-FY12). We are overall positive on the overseas integrated lifestock farming (ILF) ventures given: (i) the large population size in Indonesia and Vietnam of 227 million and 86 million respectively against Malaysia’s 27 million; and (ii) potential increase in egg consumption in both Indonesia and Vietnam as urbanisation continues, given its current low consumption of only 50 eggs per person per year versus Malaysia’s 280 eggs.
QL started the construction of its new surimi plant on 10ha of land in Surabaya, Indonesia, in April 2010. The new plant has two lines with a total initial capacity of 5,000mt per year. Earnings contribution from this new plant is expected to come in by early-FY12.
Our earnings forecasts have been reduced by 0.1%-5.0% in FY11-13 after: (i) tweaking our earnings model; (ii) assuming earnings for the Indonesia and Vietnam operations to only come in by mid- to end-FY12 instead of early-FY12 previously; and (iii) increasing our capital expenditure (capex) assumptions to RM200 million (from RM150 million) in FY11 and RM150 million (from RM140 million) in FY12 following management’s higher guidance. We maintain our capex assumption at RM150 million in FY13. The risks include: (i) decline in consumer spending power; and (ii) intensifying competition.
In our view, QL’s proven track record, together with its staple food-based business, offers investors resilient earnings that would be able to withstand economic downturns and recessions.
Our fair value has now been increased to RM4.90 (from RM4.60) based on higher PER target of 14.5 times CY11 (from 13 times CY11), to be in line with the consumer sector target PER. — RHB Research Institute, July 8
This article appeared in The Edge Financial Daily, July 9, 2010.
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