庄在作祟的QL

QL基本面并不是想象的好，市场给予的评级，只是庄在作祟，这股能走多远，要看庄能到什么极限。烂泥是扶不上墙的，如果QL没有一定分量，庄也不能长久，所以QL还不算烂泥。对我们来说，讲得越多，越有问题。这不是QL的错，是市场的错。


1. Investment Highlights / Summary
• Well diversified company with remarkable track record. QL’s business activities are diversified in the marine products, palm oil and integrated livestock industry. QL’s business activities are in line with Malaysia’s National Agriculture Plan and receive attractive tax incentives. QL is currently the largest producer of surimi in Asia and largest distributor of animal feed and surimi-based products manufacturer in Malaysia.
• Continued growth in marine products. QL is expanding its frozen surimi processing plant in Hutan Melintang to meet the increasing demand for surimi, as well as expanding its deep-sea fishing activities.
• Potential in national fisheries project. QL’s participation in the national fisheries consortium (KPNB) is a positive development, although the stake is small and details are still sketchy at the moment.
• Risks. QL’s marine and livestock businesses are susceptible to fluctuation in commodity prices. Furthermore, selling price of livestock products are controlled by Government who imposed a ceiling price. Adverse effect would be inflicted on its poultry segment in the unlikely event of a major bird flu outbreak in Malaysia.
• Initiate coverage with BUY call at RM3.03 fair value. We pegged QL’s EPS07f of 24.4 against 12.4x average PER of its regional peers in Thailand involved in marine products manufacturing business.

2. Background
Business in marine products, CPO milling & livestock farming
Corporate profile. A diversified Malaysian agricultural resource-based group, QL Resources Berhad (QL) and its subsidiaries are involved in marine products manufacturing, crude palm oil milling and integrated livestock farming.
Founded in 1987 by Mr. Chia Song Kun and other family members as a family business involved in small scale trading of marine-based products, it has since grown to become a resource-based corporation. QL was listed on the Second Board of Bursa Malaysia in March 2000, and Its listing was subsequently transferred to the Main Board in January 2002.


Largest surimi producer in Asia
Currently, management states that QL is the largest producer of surimi in Asia and largest fishmeal and surimi-based products manufacturer in Malaysia. All divisions are profitable and have been recording a turnover CAGR of 18% and profit after tax CAGR of 23% since its listing in 2000.
QL is one of the five companies invited by the Ministry of Agriculture and Agro-based Industry to join the national fisheries consortium called Konsortium Perikanan Nasional Berhad (KPNB) which was set up in October 2005.

Business. QL is involved in three main strategic business units:
i) Marine Products Manufacturing (MPM)
􀂾 Surimi and surimi-based products manufacturer. QL manufactures surimi (semi processed raw fish paste / de-boned fish meat which has been washed and frozen) and surimi-based products such as fishballs and fishcakes. Surimi is sold to other food manufacturers for further processing while surimi-based products are sold to end-consumers under its own brand names of “Double Shark”, “Double Dolphin”, “Mushroom” and “Top 1”.
40% of QL’s surimi is exported to Japan, Korea and Singapore whereas 10% of surimi-based products are exported to Singapore, Brunei and Australia. The remaining is for local consumption. Management estimates it has 25% market share locally for surimi/surimi-based products.
The Group currently operates 3 fish processing plants in Hutan Melintang in Perak, Endau in Johor and Tuaran in Sabah.
􀂾 Fishmeal manufacturer. QL is Malaysia’s largest manufacturer of fishmeal which is a high protein fish-based animal feedstuff with a local market share of 30%. Fishmeal is made from the innards, scales, heads, bones and skin of fish not used to produce surimi. 70% of fishmeal is exported to China, Sri Lanka and Vietnam.
􀂾 Deep-sea fishing. QL has 18 deep sea fishing licenses and operates 7 deep-sea fishing trawlers. These trawlers cost approximately RM1 million each. Deep sea fishing refers to fishing activities beyond 30 nautical miles offshore into the Exclusive Economic Zone and the international waters using vessels with a minimum capacity of 70 gross registered tonnes.

ii) Crude Palm Oil Milling (CPO Milling)
􀂾 Palm oil plantation and mill. QL operates a 3,000 hectare oil palm plantation and two independent crude palm oil mills in Tawau, Sabah.
iii) Integrated Livestock Farming (ILF)
􀂾 Distribution of animal feed raw materials. QL is the leading distributor of animal feed meal raw materials such as corn and soya bean meal in Malaysia, making up 18% of the Malaysian market share.
Broiler and layer farms. QL operates broiler farms (for meat) and layer farms (for eggs). Almost 70% of QL’s poultry activities are located in Sabah, East Malaysia. QL’s poultry layer farms in Negeri Sembilan, Kuching, Kota Kinabalu and Tawau produce approximately 800,000 eggs a day, making QL the leading poultry egg producer in Malaysia. QL’s broiler farms in Tawau, Sabah are known to be the leading integrated broiler producer in the Sabah state.


3. Financial Highlights
5-year turnover CAGR of 18%;profit CAGR of 22%
QL has a set of impressive financial track record. Since listing, the Group recorded a healthy turnover and net profit 5-year CAGR of 18% pa and 22% pa respectively. MPM posted highest profit CAGR at 30% followed by CPO milling (24%) and ILF (12%).

Improving margin, higher ROE
QL group’s EBITDA margin has been improving for the past several years, from 7.0% in FY04 to 7.6% in FY05. Cumulative 9-month EBITDA further strengthened to 8.9%, largely due to better performance from MPM (improved product mix) and ILF (higher ex-farm price and lower feed cost).
Both ROE and ROA measures have been on the uptrend as well. QL enhanced its ROE from 17.3% in FY03 to 22.7% in FY05. ROA increased from 4.8% to 7.5% in the same period. Cash conversion cycle too, strengthened from an estimated 64 days in FY03 to c. 50 days in FY05. Net gearing however, is slightly on the high end, at 1.4x as at FY05, further reduced to 1.3x in 3QFY06. Bulk of the borrowings is short term in nature, in the form of bills payables used for trade purposes.

While ILF contributed 64% of group revenue in FY05, PBT contribution is smaller at 33% due to nature of the business which generally has thinner margin. MPM made up bulk of profit at 44% in FY05.

4. Earnings Outlook
Expects continued growth in surimi consumption

Key growth from MPM division. Expected growth in surimi subdivision is underpinned by 1) continued growth in the consumption of surimi and surimi-based products; 2) reduction in supplies from Thailand (key exporter of surimi worldwide) due to tsunami which affected catch and fishing fleet; 3) higher capacity from the expansion of frozen product manufacturing at its Hutan Melintang plant (estimated capex RM16m).
QL is also actively increasing its deep-sea fishing licenses to expand its operations. The group recently acquired 100% of Rikawawasan Sdn. Bhd. for RM30,000.00 which provided QL 3 additional deep-sea fishing licenses.


Lower raw materials cost, higher ex-farm prices
Higher margins in poultry sector. The ILF division is expected to post improved performance this year on the back of favourable operating environment – lower feed cost (due to lower corn and soybean prices), higher ex-farm ceiling price of RM4/kg and the bird-flu status.

Palm kernel expeller to substitute animal feed?
Bio-PKE project. Through a joint-venture (JV) with Agrobiocare Sdn. Bhd. since April 2005, QL is currently undertaking the viability of commercial manufacture and sale of biologically digested feeding raw material. Using Korean technology, the JV converts palm kernel expeller (PKE), a by-product of CPO milling, into animal feed, hence substituting the more expensive corn and soybean which are subject to commodity fluctuation. As the project is still at testing phase, we have not taken any contribution from this venture into our projection.

5. Recent Developments
Offered a minority stake in KPNB
Participation in national fisheries consortium. QL is participating in a national fisheries consortium called Konsortium Perikanan Nasional Berhad (KPNB) which was set up recently by the Ministry of Agriculture and Agro-based Industry to manage, operate and oversee the integrated activities of deep-sea fishing, marketing and distribution and fish processing. KPNB will be operating no less than 50 vessels and deep sea fishing is expected to contribute 80% of KPNB’s profits.
We view QL’s participation in the consortium as a positive development, and expect QL to benefit from this national project in the long term.

However, as QL’s participation is limited to a minority stake at this point of time and sketchy details on KPNB and its mechanism todate, we have not factored in contribution from this development in our forecast.

Private placement at RM2.47 per share, raised RM49.4m
Private placement exercise. The Group has completed a 1:3 bonus issue exercise in October 2005, which increased its share outstanding from 150m to 200m shares. Subsequently, QL has also completed a private placement exercise which further increased its shares outstanding to 220m. Priced at RM2.47 per share, the exercise raised RM49.4m, with proceeds to be used for repaying bank borrowings and working capital.

6. Investment Risk
Stiff competition from Thailand. Despite QL’s remarkable claim as Asia’s largest surimi producer, competition is stiff and there are a number of big players in the industry. Strong players in Asia are the Thai and Japanese companies. It will not be an easy feat to maintain QL market share while keeping its competitors at bay.
Commodity fluctuation. QL’s ILF and CPO Milling divisions deals with commodities, and as such are susceptible to fluctuation in commodity pricing. In addition, selling price of eggs and broilers are controlled by government who impose a ceiling price, hence rendering little space to maneuver, especially during times of rising commodity price.
Bird flu issues. Government states that the bird flu incidents has so far been under control and limited to the three affected states – Selangor, Perak and Penang (none of QL farms is in these states). In fact, Malaysia expects to be declared free of bird flu soon as there has been no fresh cases report in recent days. However, should the unlikely event of an outbreak takes place, QL would be impacted.

7. Balance Sheet (skip)

8. Valuation
We view MPM and ILF as the key contributors to QL’s profit in the
months, and therefore, we have selected companies from
production sector and the poultry sector as the Group’s peers.

Thai peers in marine products business
For MPM, we picked the following Thai companies as there are no close listed peer in Malaysia, plus Thailand is a major exporter of frozen seafood products (including surimi) in the world:

Considering MPM contributes the largest portion to Group profit and it holds promising outlook, we view pegging our EPS07f to its regional MPM peers of 12.4x as fair and appropriate. This is also roughly in line with QL’s historical 3-year average PER of 12.9x.

Fair value at RM3.03
Pegging QL’s EPS07f of 24.4sen (EPS accounted for the proposed 20m private placement shares) to PER of 12.4x yields a fair value of RM3.03.

9. Recommendation
Initiate with BUY call
We like QL for 1) its capable management, 2) healthy fundamentals backed by good track record, 3) clear growth plans, and 4) potential upside surprise from its biotech ventures and participation in the fisheries consortium.
We are initiating our coverage on QL with a BUY call and a fair value of RM3.03, representing a potential upside of 15.2%.

Analyst: Nicole Tan Yoke Ping (nicole@zj.com.my)


filed:QL_20060403_IR.pdf

complete report found on ZJ advisory