Livestock farming and marine product will continue to drive QL’s growth, while its plantation and clean energy segment will focus on ESG. It will also expand its convenience store chain (CVS) at a more measured pace adjusting to the softer consumer sentiment. We raise our forecasts marginally, lift our TP by 5% to RM6.25 (from RM5.95) but downgrade our call to MARKET PERFORM from OUTPERFORM after the recent run-up in its share price.

We walked away from a meeting with QL feeling assured of its near-term prospects. The key takeaways are as follows:

1. Its livestock farming segment is likely to maintain momentum, supported by a government subsidy of 10 sen per egg, and a price ceiling of 41- 45 sen for grade A-C eggs. This subsidy is currently projected to persist through 1HCY24, but may be subject to a 2HCY24 review, in our view, considering the anticipated stabilisation in egg supply. Should the subsidy be withdrawn, egg prices could rise by an additional 10 sen, depending on the grade. Overall, any demand impact from these changes is expected to be minimal, as eggs are a staple food item for the general public.

2. Its marine product division is set for growth in 3QFY24, driven by higher fish landings due to El Niño and better performance of its surimi-based products, facilitated by lower input costs. Expansion projects in Surabaya, Indonesia, and Johor are on schedule for completion in FY24, significantly enhancing its surimi-based production. The Indonesian facility will boost capacity by 25,000 MT, and the Kulai, Johor plant by 7,000 MT, collectively raising QL's total capacity by 49% to 97,000 MT annually. However, this expanded capacity will be utilized incrementally, aligning with product demand. Based on our rough estimation, we expect these additional capacities could contribute additional RM22m/RM79m sales in FY24/FY25, respectively.

3. Its plantation and clean energy division segment will continue to be driven by higher contribution from its 52.57%-owned subsidiary – BM Greentech which is expected to continue focusing on higher-margin segments (>10%) such as water treatment and solar energy, benefitting from various government energy initiatives. On the other hand, the plantation segment is likely to remain lacklustre due to softening CPO prices. It is understood that QL is currently strategically shifting away from the palm oil business to concentrate more on operations that are friendlier to ESG standards.

4. Its CVS which is anchored by FamilyMart outlets anticipates a slow expansion in FY24, with new openings reduced from a target of 72 to just over 60, due to softening consumer sentiment. QL has increased its store count by 22 to 379 in 1HFY24, with a target to exceed 417 by the end of FY24, focusing on new locations in the northern region, east coast, and new townships in the Klang Valley. While store expansion is expected to boost revenue, higher labour and energy costs may limit the segment’s performance in FY24. Key strategies for this segment in the remaining quarters include continued cost optimisation and maintaining a strong brand presence.

5. QL indicated that its annual capex is within the RM200m-RM300m range (vs. our RM250m-RM350m assumption range) with key focus on expanding its marine product division. The group has earlier shared that it planned to spend: (i) RM40m to increase its prawn aquaculture production capacity from present 2k MT to 6k MT within the next 4 years, and (ii) RM50m capex spend in building capacity for new frozen surimi-based products in Surabaya. It also plan to build a new state of art surimi-based products plan in the next five years on a 200 acres land next to existing plant in Hutan Melintang. 

Forecasts. We raise our FY24/FY25 net profit forecasts by 0.5%/1.8% after factoring in higher contribution from its marine product division. Besides, we also lowered our FY24F/FY25F capex assumption to RM265m/RM275m from RM320m each previously. 

Valuation. We raise our DCF-derived TP to RM6.25 (WACC: 5.8%; TG: 2%) from RM5.95 previously, after lowering our capex assumptions. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us. 

Investment case. We like QL for: (i) the consistent high export demand for its marine products, supported by robust fish landings and decreasing input costs, (ii) the high growth potential of its Family Mart convenience store franchise, highlighted by its popular Japanese-themed products and continued expansion, including the new Family Mart Mini outlets targeting petrol stations and highways, and (iii) it growing poultry business in Indonesia and Vietnam, driven by increasing protein consumption as living standards rise. Given the limited upside potential (<6%) after the recent run-up in its share price, we downgrade our call to MARKET PERFORM from OUTPERFORM. 

Risks to our call include: (i) inability of pass on cost inflation, (ii) rough and aggressive monsoon seasons, (iii) changes in fishing regulations, and (iv) MYR strengthening against the USD.

Source: Kenanga Research - 16 Jan 2024