QL to benefit from multi-pronged strategies

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QL Resources Bhd
(Nov 7, RM3.40)
Raise to “buy” with target price of RM 3.90:
QL continues to see strong demand for fishmeal in Malaysia and Indonesia, while sales for surimi and surimi-based products are also improving. In view of this, QL is adding new production capacity to its Surabaya plant.

To enhance its product offering, QL is also constructing a new snack food factory at its Hutan Melintang plant, which is targeted for commencement by early 2015.

Management also expects its new venture into shrimp farming in Kudat, Sabah to start contributing in the coming quarters, with shrimp prices remaining strong.

To capitalise on the increasing egg consumption pattern in the region, QL is looking to expand its livestock farming operations in Indonesia and Vietnam. QL is also currently constructing its new feedmill plant in Indonesia, as this would help to mitigate further margin erosion that would come from the volatile feed cost.

Management remains cautious about the outlook for its palm oil activities, as unfavourable crude palm oil (CPO) prices would affect its plantation results. In addition, increasing competition for fresh fruits bunch (FFB) supplies will likely also affect its CPO mill margins.

However, improved tree maturity profile could potentially support the FFB production growth in financial year 2015 (FY15), mitigating the adverse impact from the softening of CPO prices.

We upgrade QL to “buy” (vs neutral) with a higher target price of RM3.90 (from RM3.60), pegged to a new target price-to-earnings ratio (PER) of 22 times calendar year 2015 (CY15) earnings per share (EPS) (from 21 times
previously), which is within the range of its 5-year historical trading band.

We ascribe higher PER target due to its resilient growth, with estimated two-year earnings compound annual growth rate of 22.6%. QL has solid fundamentals and a unique defensive business model. — RHB Research, Nov

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This article first appeared in The Edge Financial Daily, on November 10, 2014.