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PP 7767/09/2011(028730)

Malaysia

MARKET DATELINE

PP 7767/09/2011(028730) Mala y sia MARKET DATELINE Corporate Highlights Visit Note QL Resources Expansions To Start

Corporate Highlights

Visit Note

QL Resources

Expansions To Start Contributing From FY12 Onwards

25 October 2010
25 October 2010

RHB Research Institute Sdn Bhd A member of the RHB Banking Group

Company No: 233327 -M

 

25

October 2010

Share Price

:

RM5.08

Fair Value

:

RM5.50

Recom

:

Outperform

 

(Maintained)

Table 1 : Investment Statistics (QL; Code: 7084)

Bloomberg: QLG MK

 

Net

Net

FYE

Turnover

profit

EPS

Growth

PER

C.EPS*

P/NTA

Gearing

ROE

GDY

Mar

(RMm)

(RMm)

(sen)

(%)

(x)

(sen)

(x)

(%)

(%)

(%)

2010a

1,476.7

106.4

26.9

19.2

15.1

-

3.4

0.2

24.2

2.5

2011f

1,671.7

124.1

31.4

16.6

16.2

31.0

3.5

0.4

23.5

2.1

2012f

1,825.2

139.9

35.4

12.7

14.4

38.0

2.9

0.2

22.0

2.3

2013f

1,965.9

171.9

43.5

22.9

11.7

42.0

2.4

0.1

22.4

3.0

Main Market Listing / Trustee Stock / Syariah Approved Stock By The SC

 

* Consensus Based On IBES Estimates

 

We recently had a meeting with management to discuss all three of their divisions’ developments and prospects.

 
 

Issued Capital (m shares) Market Cap (RMm)

 

395.2

1,600.5

Business model replication in Jakarta and Vietnam. QL is in the midst of constructing its 13Ha Breeder and 17Ha Layer plant in Cianjur district, located approximately 2 hours from Jakarta. The plant is expected to contribute 12m day old chicks/year by end FY11 and 1m eggs/day by end FY12. Similarly in Tay Ninh, Vietnam, QL started construction on its egg plant in May of this year. The plant is expected to produce 500k/eggs per day by end FY12, with similar margins as Malaysia i.e. 24-25 sen/egg selling price and about 7-8% in PBT margins.

Daily Trading Vol (m shs)

0.3

52wk Price Range (RM)

2.42-4.09

 

Major Shareholders:

 

(%)

CBG Holdings Sdn Bhd

47.0

Farsathy Holdings

13.4

 
 

FYE Mar EPS chg (%)

FY11

FY12

FY13

-

2.0

5.7

 

Var to Cons (%)

1.3

(6.8)

3.6

 

PE Band Chart

 

Business model replication in Surabaya. For its MPM division, QL is expecting to complete Phase 1 of its new plant in Surabaya, Indonesia by March 2011. The Surimi and Fishmeal plant is situated on a 10Ha land, and the overall cost would be around RM30-35m. With a capacity of 5k mt of Surimi and 5k mt of fishmeal, the plant will increase QL’s current capacity by 20%. As the new plant is expected to be completed by March 2011 (end FY11), we believe that it will contribute approximately RM3.4-3.7m towards FY12-13 EBIT, which we have already previously accounted for in our forecast.

Plantation in Kalimantan to mature in 2012. QL has finished planted 8,500 ha of land in Eastern Kalimantan around mid of this year. By FY13, the group aims to finish planting 15k Ha. The 8,500 Ha that was planted is expected to mature in FY13, thus doubling its production from FY12. We estimate that EBIT from the division would then be approximately RM32.9m, which we have already accounted for in our forecasts. However, an upside earnings surprise might come from the POA division as QL is going into more downstream activities.

Forecasts. After tweaking our ILF assumptions, our FY12-13 earnings are thus adjusted upwards slightly by 2-6%.

Risks. The risks include: 1) significant drop in demand; 2) significant increase in raw material prices; 3) significant change in CPO price trend; 4) foreign exchange risk; and 5) aggressive growth that may strain its balance sheet.

Investment case. Our fair value is raised slightly after the earnings changes. It is now RM5.50 (RM5.41 previously) based on unchanged target 16x CY11 EPS. We maintain our Outperform recommendation.

Please read important disclosures at the end of this report.

PER = 15x PER = 12x PER = 9x PER = 6x
PER = 15x
PER = 12x
PER = 9x
PER = 6x

Relative Performance To FBM KLCI

QL Resources FBM KLCI
QL Resources
FBM KLCI

Hoe Lee Leng (603) 92802641 hoe.lee.leng@rhb.com.my

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Page 1 of 5

Visit Note 25 October 2010 We recently had a meeting with management to discu ss

Visit Note

25 October 2010

We recently had a meeting with management to discuss all three of their divisions’ developments and prospects. Here are the key takeaways from the meeting:

Integrated Livestock Farming (ILF)

Business model replication in Jakarta. QL is in the midst of constructing its 13Ha Breeder and 17Ha Layer plant in Cianjur district, located approximately 2 hours from Jakarta. The plant is expected to contribute 12m day old chicks/year by end FY11 and 1m eggs/day by end FY12. The eggs will be sold locally in Jakarta at ~30 sen/egg, which we estimate would translate to a PBT margin of 6-7%, which is slightly lower than that of Malaysia of 8%. Its ‘day old chicks’ can be sold at RM1.40-1.50 per chick, with an expected PBT margin of 25- 30%. We expect the operations in Jakarta to contribute about RM3.6m towards EBIT in FY12 and RM12.6m in FY13, as both its egg and ‘day old chicks’ production move towards full capacity. Note that the egg and ‘day old chick’ capacity of 1m/day and 12m per year, is Phase 1 of the project, as there is excess land around the plant for QL to further increase its production capacity in the future (Phase 2), which could potentially come through by FY14. Note that in terms of capex, Phase 1 would cost a total of RM60-70m. In terms of demand, the egg consumption in Indonesia is currently low at 80 eggs per person per year vs. Malaysia’s 280 per person per year, thus providing QL with ample growth opportunities.

Same situation in Vietnam. Similarly in Tay Ninh, Vietnam, QL started construction on its egg plant in May of this year. The plant is expected to produce 500k/eggs per day by end FY12, with similar margins as Malaysia i.e. 24-25 sen/egg selling price and about 7-8% in PBT margins. We estimate this will translate to an EBIT contribution of RM3.0m (9-10%) for FY13. The capacity is Phase 1, and similar to Jakarta, QL will be able to expand its capacity (Phase 2) as there is ample land around the plant. However, unlike the Jakarta plant, Vietnam will not be producing ‘day old chicks’. Note that Phase 1 for Vietnam would cost QL a capex of RM25-

35m.

Tweaking our forecasts. Although we have previously assumed the contribution from the new capacity coming from Indonesia and Vietnam, we are tweaking our assumptions slightly given further clarity on the expected contributions. We are changing 1) our Indonesia egg production capacity to 1m/day for FY13, from 500k/day previously; and 2) our Indonesia ‘day old chicks’ production to 12m from 10m previously.

Marine Products Manufacturing (MPM)

Business model replication in Surabaya. For its MPM division, QL is expecting to complete Phase 1 of its new plant in Surabaya, Indonesia by March 2011. The Surimi and Fishmeal plant is situated on a 10Ha land, and the overall cost would be around RM30-35m. With a capacity of 5k mt of Surimi and 5k mt of fishmeal, the plant will increase QL’s current capacity by 20%. Unlike the ILF division where the products will be sold locally i.e. Indonesia, Vietnam and Malaysia, the new plant will be purely capacity expansion as QL will still export its MPM products to international markets such as Japan. As the new plant is expected to be completed by March 2011 (end FY11), we believe that it will contribute approximately RM3.4-3.7m towards FY12-13 EBIT, which we have already previously accounted for in our forecast.

Palm Oil Activities (POA)

Plantation in Kalimantan to mature in 2012. QL has finished planted 8,500 ha of land in Eastern Kalimantan around mid of this year. By FY13, the group aims to finish planting 15k Ha. The 8,500 Ha that was planted is expected to mature in FY13, thus doubling its production from FY12. We estimate that EBIT from the division would then be approximately RM32.9m, based on CPO prices of RM2700/tonne, which we have already accounted for in our forecasts previously. However, an upside earnings surprise might come from the POA division as QL is going into more downstream activities.

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Page 2 of 5

25 October 2010 ♦ Renewable energy incentives. As previously highlighted, QL’s POA division is aiming

25 October 2010

Renewable energy incentives. As previously highlighted, QL’s POA division is aiming to manufacture a zero- waste palm oil mill system, which will utilise palm oil wastes to be converted into energy. The potential of this division is clearer given the recent tabling of the Government Budget which extended the application period for various tax incentives for the usage and production of renewable energy: 1) the generation of energy from renewable source; 2) energy conservation; and 3) reduction of greenhouse gas emissions. The application period of all three was extended to 2015. Furthermore, the implementation of the Feed in Tarif (FiT) will be a core reason for palm oil millers to utilise QL’s zero waste palm oil mill system. FiT will essentially allow renewable energy producers such as QL to sell the electricity generated to utility companies. Not only will QL benefit directly from FiT, but indirectly, it will increase the attractiveness and marketability of QL’s zero waste system. Note that we have not accounted any contribution from this downstream activity given the long gestation period for any new type of technology to gain commercial acceptance.

Overall

Financing the growth. Based on all three divisions’ expansions combined with existing capex requirements, we expect QL to require approximately RM250m in capex for both FY11 and FY12. QL’s current cashflow is not sufficient to finance all these expansions, and it would likely need to gear up further or do a corporate exercise to raise funds. QL currently has a net gearing of 60% (as at 1QFY03/11), and management has mentioned a tolerable maximum net gearing level of 80-90%. Besides raising additional debt, we believe the most likely corporate exercise would be a 10% private placement. Based on QL’s current share price and market capitalisation, we believe it would be able to raise as much as RM150-200m. For its POA division, we believe that its capital requirements will partially be financed by the listing of Boilermech of which it has a 40.51% stake in, slated to be by beginning of 2012.

Risks

Risks to our view. The risks include: 1) significant drop in demand; 2) significant increase in raw material prices; 3) significant change in CPO price trend; 4) foreign exchange risk; and 5) aggressive growth that may strain its balance sheet.

Forecasts and Assumptions

Forecasts. After the tweaking of our ILF assumptions, our FY12-13 earnings are thus adjusted upwards slightly by 2-6%.

Valuations and Recommendation

Investment case. Our fair value is raised slightly after the earnings changes. It is now RM5.50 (RM5.41 previously) based on unchanged target 16x CY11 EPS. We maintain our Outperform recommendation.

Table 2: Earnings Forecasts

FYE Mar (RMm)

FY10

FY11f

FY12f

FY13f

Turnover

1,476.7

1,671.7

1,825.2

1,965.9

Turnover growth (%)

5.6

13.2

9.2

7.7

Cost of Sales

(1,193.2)

(1,338.6)

(1,451.1)

(1,529.1)

Gross Profit

283.5

333.1

374.2

436.8

EBITDA

230.5

276.2

317.3

376.6

EBITDA margin (%)

15.6

16.5

17.4

19.2

Depr&Amor

40.8

49.7

56.7

63.2

Net Interest

(13.1)

(19.3)

(24.8)

(23.6)

Pretax Profit

136.2

158.2

179.7

227.1

Tax

(21.5)

(23.7)

(27.0)

(34.1)

Minorities

(8.2)

(10.4)

(12.9)

(21.1)

Net Profit

106.4

124.1

139.9

171.9

Source: Company data, RHBRI estimates*

Table 3: Forecasts Assumptions

FYE Mar

FY11F

FY12F

FY13F

Revenue growth (%) Marine Palm oil ILF

13.8

17.2

9.6

5.6

11.2

21.6

2.8

5.6

13.1

EBIT margin (%) Marine Palm oil ILF

15.8

15.7

15.8

6.7

8.7

13.8

8.8

9.0

9.3

Source: RHBRI

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25 October 2010 Chart 1: QL Technical View Point ♦ The share price of QL

25 October 2010

Chart 1: QL Technical View Point

25 October 2010 Chart 1: QL Technical View Point ♦ The share price of QL has

The share price of QL has been trending along the supportive uptrend on the 10-day and 40-day SMAs since Mar 2009.

In recent events, the stock rebounded from a mild profit-taking dip near the 40-day SMA and surpassed the RM4.66 important level in Sep 2010.

The breakout led to a further rally on the share

price to a fresh all-time high of RM5.11 in mid Oct

2010.

Last Friday, it recorded another positive candle after a brief consolidation in recent trading.

The bounce, added with the bullish twist on the momentum indicators, plus the support from the 10-day SMA near RM5.05 suggest a further rally likely in the near term.

We remain bullish on the stock and foresee a fresh level to be recorded soon if it surpasses the RM5.10 immediate resistance level this week.

This uptrend will remain firm so long as it can sustain at above the 40-day SMA near RM4.73 and near the key resistance-turn-support level of

RM4.66.

IMPORTANT DISCLOSURES

This report has been prepared by RHB Research Institute Sdn Bhd (RHBRI) and is for private circulation only to clients of RHBRI and RHB Investment Bank (previously known as RHB Sakura Merchant Bankers). It is for distribution only under such circumstances as may be permitted by applicable law. The opinions and information contained herein are based on generally available data believed to be reliable and are subject to change without notice, and may differ or be contrary to opinions expressed by other business units within the RHB Group as a result of using different assumptions and criteria. This report is not to be construed as an offer, invitation or solicitation to buy or sell the securities covered herein. RHBRI does not warrant the accuracy of anything stated herein in any manner whatsoever and no reliance upon such statement by anyone shall give rise to any claim whatsoever against RHBRI. RHBRI and/or its associated persons may from time to time have an interest in the securities mentioned by this report.

This report does not provide individually tailored investment advice. It has been prepared without regard to the individual financial circumstances and objectives of persons who receive it. The securities discussed in this report may not be suitable for all investors. RHBRI recommends that investors independently evaluate particular investments and strategies, and encourages investors to seek the advice of a financial adviser. The appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives. Neither RHBRI, RHB Group nor any of its affiliates, employees or agents accepts any liability for any loss or damage arising out of the use of all or any part of this report.

RHBRI and the Connected Persons (the “RHB Group”) are engaged in securities trading, securities brokerage, banking and financing activities as well as providing investment banking and financial advisory services. In the ordinary course of its trading, brokerage, banking and financing activities, any member of the RHB Group may at any time hold positions, and may trade or otherwise effect transactions, for its own account or the accounts of customers, in debt or equity securities or loans of any company that may be involved in this transaction.

“Connected Persons” means any holding company of RHBRI, the subsidiaries and subsidiary undertaking of such a holding company and the respective directors, officers, employees and agents of each of them. Investors should assume that the “Connected Persons” are seeking or will seek investment banking or other services from the companies in which the securities have been discussed/covered by RHBRI in this report or in RHBRI’s previous reports.

This report has been prepared by the research personnel of RHBRI. Facts and views presented in this report have not been reviewed by, and may not reflect information known to, professionals in other business areas of the “Connected Persons,” including investment banking personnel.

The research analysts, economists or research associates principally responsible for the preparation of this research report have received compensation based upon various factors, including quality of research, investor client feedback, stock picking, competitive factors and firm revenues.

The recommendation framework for stocks and sectors are as follows : -

Stock Ratings

Outperform = The stock return is expected to exceed the FBM KLCI benchmark by greater than five percentage points over the next 6-12 months.

Trading Buy = Short-term positive development on the stock that could lead to a re-rating in the share price and translate into an absolute return of 15% or more over a period of three months, but fundamentals are not strong enough to warrant an Outperform call. It is generally for investors who are willing to take on higher risks.

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Market Perform = The stock return is expected to be in line with the FBM

Market Perform = The stock return is expected to be in line with the FBM KLCI benchmark (+/- five percentage points) over the next 6-12 months.

Underperform = The stock return is expected to underperform the FBM KLCI benchmark by more than five percentage points over the next 6-12 months.

Industry/Sector Ratings

Overweight = Industry expected to outperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Neutral = Industry expected to perform in line with the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Underweight = Industry expected to underperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

RHBRI is a participant of the CMDF-Bursa Research Scheme and will receive compensation for the participation. Additional information on recommended securities, subject to the duties of confidentiality, will be made available upon request.

This report may not be reproduced or redistributed, in whole or in part, without the written permission of RHBRI and RHBRI accepts no liability whatsoever for the actions of third parties in this respect.

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