QL Resources, A Strong Start to FY09

QL Resources (TP RM3.90-BUY) 1QFY09 Results Review: A Strong Start to FY09
27/08/08
BUY Maintain
Price RM2.74

QL produced another strong quarter with 1QFY09 earnings of RM21.5m, which was 23% above our expectation. 1Q earnings grew 39.7%, mainly attributed to the strong performance in the all 3 divisions, particularly POA (palm oil activities), as CPO prices averaged at a high of about RM3,500/tonne during the quarter. The POA division PBT grew a hefty 91.6% while the marine product manufacturing (MPM) and integrated livestock farming (ILF) division expanded with PBT growth of 30.1% and 54.2% respectively. There is no change in our earnings estimates. We maintain a BUY with an unchanged target price of RM3.90.

Better margins. PBT margin improved from 5.9% to 7.4%, attributable to strong performance in all its divisions. As a result of the better selling prices and higher contributions, PBT margin for MPM improved from 13.8% to 15%. The PBT margin for the ILF’s division also grew significantly from 3.9% to 6.1%, thanks to better selling prices in its trading.

Expansion in ILF. The acquisition of 100% equity interest in Heap Loong Poultry Farm SB (HLP) at the price of RM5.7m has been completed. HLP has a production capacity of 305,000 eggs per day. This acquisition may not increase QL’s earnings significantly, but would broaden its market base and presence throughout Malaysia.

Maintaining our numbers. We are maintaining our FY09 and FY10 earnings forecasts at RM91.2m and RM101.3m respectively despite a strong 1Q as we believe the June fuel hike may slightly affect its shipping operation. Moreover, the softening in CPO prices in recent weeks may also impact on the POA division in the next 2 quarters. Nevertheless, should the company able to manage these, we may revise our earnings forecast in the next quarter. QL’s balance sheet is manageable, with net gearing of 0.7x and strong interest coverage ratio of 11x.

Maintain BUY. The target price is unchanged at RM3.90 based on the average 12.5x PER over CY09 EPS of 33.4 sen and 2.6x P/BV. Despite the bearish market, QL’s share price has outperformed the KLCI by almost 40% in the past 6 months. We reiterate our BUY recommendation.