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Monday, December 31, 2012

QL (FV RM4.05 – BUY) Stock Pick: A Good Catch

buy Fair Value: MYR4.05
QL, alrea dy a leading marine products and poultry player, is forging ahead with its expansion into highly populated ASEAN countries like Vietnam and Indonesia. We expect earnings from the group’s marine, integrated poultry and palm oil operations in Indonesia to kick in strongly by FY14, taking QL’s numbers to new heights. We like its resilient business and solid management. Maintain BUY, with FV unchanged at RM4.05.

25 years of uninterrupted growth. QL Resources has evolved from a livestock feed trading company with a small fishery into a successful marine and poultry egg producer with a fast-growing palm oil business. Backed by a solid business model, QL’s exposure to three sustainable basic food industries has enabled it to deliver remarkable results in the last 25 years.

Marine business leads the way. As the leading surimi producer in Malaysia with 25k tonnes of capacity, QL has four marine manufacturing plants in Malaysia and one in Brondong, Surabaya. It is No.1 in chilled fabricated fish-based products in Malaysia, manufacturing 30k tonnes of surimi-based products a year, as well as the country’s largest fishmeal producer, making 25k tonnes of fishmeal annually. In view of the bountiful supply of fish in Indonesia and the promising outlook for the global surimi industry, the group ventured into Surabaya, Indonesia with a 10k-tonne capacity surimi plant, up from 5k tonnes previously, after it beefed up capacity in August 2012. The group is also building a new frozen surimi factory with annual capacity of 15k tonnes in Hutan Melintang, as well as a new cold room for surimi-based products in Johor Bahru (5k tonnes.), and a frozen fish cold room in Endau (2k tonnes).

The next catalyst - Indonesia. QL is targeting to ramp up egg production at its integrated livestock farm in Indonesia to 900k eggs per day (epd) by March 2013 from 450k epd currently. It also plans to increase the number of day old chicks (doc) from 1.3m to 2.5m docs per month by March 2013. We believe that the group’s Indonesian operation will fuel its future earnings given the aggressive expansion in marine production, integrated poultry and palm oil divisions.

Top consumer sector pick. Our Top Buy in the consumer sector, QL is a relatively safe bet amid economic uncertainties due to its earnings track record and defensiveness. Maintain BUY, with RM4.05 FV, based on 19x CY13 EPS.

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