Thumbs up!
We left QL’s meeting feeling optimistic as its continuous search for opportunities to expand points to strong demand. It is expanding its existing businesses in Malaysia, Indonesia and Vietnam while targeting to turn around its palm oil business in Indonesia and frozen marine product business in China.
While we expect its FY3/14 results to meet expectations, we reduce
our FY15-16 net profit forecasts by 3-9% for higher expenses for its palm oil division. We also raise our target price as we tag a higher target P/E of 22.5x (from 20.7x) to QL after removing our 10% discount to the average consumer sector P/E given its larger market cap currently and much stronger earnings growth as compared to its peers. The stock remains an Add.
What Happened
Key takeaways from our recent meeting with management were (1) its largest frozen plant for surimi-based products has started operating and it is looking for more land for expansion, (2) it is on track to achieve 85 prawn breeding ponds in Dec 2014 and expects positive earnings contribution in FY15, (3) its
egg business in Indonesia and Vietnam is growing larger and has started moving into the modern trade channel. Given the strong demand, it is also looking for land for expansion, and (4) its palm oil activities in Indonesia could break even or in the black in FY15 due to the increasing maturity of crops.
What We Think
Due to the strong demand, QL has been expanding continuously. Given the strong demand and the fact that it is always looking for opportunities to expand, we are confident that it can continue to deliver strong earnings growth.
Although its egg business is relatively volatile due to the fluctuating prices for corn, soybean and eggs, its raw material trading business commands quite a steady margin. The more volatile poultry business will also be supported by its
fishery business which sees strong demand and much steadier pricing. If its palm oil business in Indonesia turns around in FY15 as guided by the company, it will serve another earnings growth pillar.
What You Should Do
Accumulate QL. QL is trading at 19x CY15 P/E. We think it deserves a higher multiple given its stellar earnings growth track record and its sizeable market share which gives it significant competitive advantage. The stock could be
catalysed by the turnaround of its MPM business in China which enables it to tap into China’s huge consumer market.
~snip~
POA from Indonesia to break even in FY15
After a long gestation period, QL is expecting its palm oil activities (POA) to break even in FY15 due to the increasing maturity of crops. As at end-December 2013, out of the total 20k ha landbank in eastern Kalimantan, QL has planted
10k ha, of which 50% has matured. Because of some of these matured estates, QL is required to book the related expenses to the P&L instead of capitalising them, thereby lengthening the breakeven period. We estimate that the Indonesia plantation will generate a slight PBT of RM7m in FY15 and RM15m in FY16.
~snip~
While we expect its results to come in within our expectation, we reduce our FY15-16 net profit forecasts by 3-9% for higher expenses for its palm oil division due to the booking of expenses related to some matured estates.
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