QL Resources. Company Guide

Transcription

1 Version 6 Bloomberg: QLG MK Reuters: QLRES.KL Refer to important disclosures at the end of this report Malaysia Equity Research 30 May 2017 HOLD Last Traded Price ( 29 May 2017): RM4.96 (KLCI : 1,764.89) Price Target 12-mth: RM4.80 (-3% downside) (Prev RM4.60) Shariah Compliant: Yes Analyst Inani Rozidin inanirozidin@alliancedbs.com What s New 4QFY17 earnings below expectations Weaker-than-expected margin from MPM segment FamilyMart venture is on track Maintain HOLD with higher TP of RM4.80 Price Relative Forecasts and Valuation FY Mar (RM m) 2017A 2018F 2019F 2020F Revenue 3,012 3,432 3,967 4,285 EBITDA Pre-tax Profit Net Profit Net Pft (Pre Ex.) Net Pft Gth (Pre-ex) (%) EPS (sen) EPS Pre Ex. (sen) EPS Gth Pre Ex (%) Diluted EPS (sen) Net DPS (sen) BV Per Share (sen) PE (X) PE Pre Ex. (X) P/Cash Flow (X) EV/EBITDA (X) Net Div Yield (%) P/Book Value (X) Net Debt/Equity (X) ROAE (%) Earnings Rev (%): (10) (10) - Consensus EPS (sen): Other Broker Recs: B: 1 S: 2 H: 10 Source of all data on this page: Company, AllianceDBS, Bloomberg Finance L.P Dragged down by MPM segment Maintain HOLD. We trim our FY18/FY19 earnings by 10% to reflect the challenging business environment for the marine products manufacturing (MPM) segment. This segment reported its lowest PBT margin since FY13, i.e. 16.5% in FY17, and we do not expect margins to improve in the near term. Although we expect improvements for its palm oil activities (POA) and integrated livestock farming (ILF) segments, we believe this has already been priced in. Volume, capacity expansion the next step. QL s core staple food businesses will likely remain resilient despite expectations of a slowdown in Malaysia s private consumption and economic growth. Hence, to boost near-term growth, QL plans to ramp up its regional feedmill production, aquaculture (prawn farming) project, and the volume of frozen surimi-based products plus snack foods for export. Although we continue to like QL for its diversified business model, we believe such near-term growth initiatives are priced in and unlocking the long-term earnings potential of its expansion plans could be a key re-rating catalyst. FamilyMart venture to offer long-term synergies. FamilyMart QL s venture with Japan s FamilyMart Co. Ltd targets to open 300 stores in five years. Thus far, 10 stores had been opened in The intention to focus on ready-to-eat F&B will bring synergies to QL s surimi-based products, snack foods, and processed poultry product businesses. However, the earnings impact in the near term is negligible given the prerequisite 2-3 years gestation period. In the mid to long term, positive accretion from this venture will depend a lot on FamilyMart s ability to differentiate itself from its competitors such as 7-11 Malaysia and Bison. Valuation: After rolling forward our valuations, our DCF-derived TP rises to RM4.80 (8.0% WACC, 5% TG), which implies an FY18F PE (ending March) of 26x. Key Risks to Our View: Severe price volatility is a threat to commodity-intensive sectors like poultry. Prolonged weak product prices or high feed costs may hurt earnings, though QL s integrated and diversified structure implies less earnings fluctuations than its peers. At A Glance Issued Capital (m shrs) 1,248 Mkt. Cap (RMm/US$m) 6,190 / 1,450 Major Shareholders (%) CBG Holdings Sdn Bhd 42.1 Farsathy Holdings Sdn Bhd 12.1 Free Float (%) m Avg. Daily Val (US$m) 0.55 ICB Industry : Consumer Goods / Food Producers Refer to important disclosures at the end of this report ed: CK/ sa: BC

2 WHAT S NEW Hiccups in the MPM segment Highlights FY17 core earnings of RM196m (+2% y-o-y) were behind our/consensus expectations, with lower margins from the MPM segment offsetting improvements in the palm oil activities (POA) and the integrated livestock farming (ILF) segment. 4Q17 core net profit came in at RM47m (+24% y-o-y). QL announced a DPS of 7.25 sen in FY17, which implies 46% payout. This is in conjunction with the company s 30 th anniversary. QL s dividend policy payout still remains at 30%. proportion of QL s total capex, as the requirement perstore of c.rm200k is small in comparison to the group s expected annual capex of RM m. The intention to focus on ready-to-eat F&B will bring synergies to QL s surimi-based products, snack foods, and processed poultry product businesses. However, the earnings impact in the near term is negligible given the prerequisite 2-3 years gestation period. In the mid to long term, positive accretion from this venture will depend a lot on FamilyMart s ability to differentiate itself from its competitors such as 7-11 Malaysia and Bison. Stable ILF segments The ILF division saw topline grew by 4% y-o-y to RM1.78bn, due to higher volume of raw feed material traded. PBT improved by 20% y-o-y to RM88m due to gain on disposal of investment properties of RM10m. Excluding the gain on disposal, PBT grew by 6%to RM78m. Although egg prices have been stagnant at 31 sen in Peninsular Malaysia, we are positive of QL prospects as it is expanding its ILF segment in Indonesia, Vietnam and East Malaysia which command better egg prices. MPM earnings declined due to lower surimi operations QL s MPM segment revenue grew by 5% y-o-y to RM877m, due to better pricing of surimi. However, PBT contracted by 13% y-o-y to RM145m, as a result of lower contribution from surimi and fishmeal operations on the back of overall lower fish catch. This drove up production costs and consequently, MPM s profitability saw a decline with a PBT margin of 16.5% in FY17 (FY16: 19.6%). POA earnings to improve in FY17 In FY17, palm oil activities (POA) segment s revenue increased by 14% y-o-y to RM308m and PBT soared by 138% y-o-y to RM12m. This was attributable to higher CPO price of RM3,129/MT in FY17 (FY16:RM2,321/MT). Moreover, lower FFB produced and processed by the Sabah palm oil unit was mitigated by higher contributions from the Indonesian plantations. Upstream plantations in Indonesia are having an increasing maturity profile (4-7 years old). FFB production in FY18 is projected to increase by 50% to 120k MT. Outlook FamilyMart venture to offer long-term synergies QL has signed an area franchise agreement with Japan s FamilyMart Co. Ltd to open 300 stores in five years. Thus far, 10 stores had been opened in FY17. We anticipate capex needs for this venture to make up a small MPM to expand into food manufacturing QL plans to produce surimi-based products as an extension of its existing Surabaya operations this is in progress and should be realised in three years. Meanwhile, QL plans to set up a distribution centre in Indonesia to provide an immediate channel to market its surimi-based products from the plants in Hutan Melintang and Johor. QL s Hutan Melintang unit is constructing a new chilled surimi-based production plant with an estimated capacity of 25k MT, whose completion is slated for 3QFY18. Phase 1 of the new plant that specialises in frozen surimibased products in Kulai, Johor has been completed, with full completion expected in the next two years. The new plants will be technologically enhanced with more automation, less manpower requirements and improved production efficiency. QL is also ramping up its commercial prawn farming initiative with earnings contribution of RM1-2m in FY17. We are optimistic on the prospects of commercially cultivated aquaculture-based products as this business carries high margins similar to surimi-based products and it is possible for QL to aggressively expand the farming volume in the future. ILF to count on raw material feed trade for near-term earnings boost The recent completion of the new commercial feedmill in Bekasi, Indonesia is expected to increase FY18 s total group production by >200k MT/yr from >980k MT/yr currently. This additional volume allows QL to enhance its cost efficiency and expand further into commercial feedmilling. There are plans to build additional commercial feedmill plants in Indonesia and Malaysia, supported by management s efforts to replicate its local raw material trade business regionally. Page 2

3 Our interactive QL model We invite readers to explore the effects of changes in the various assumptions we imputed with our interactive model. We highlight two possible near-term scenarios: 1) egg oversupply, and 2) surimi price increase these illustrate the stability of QL s integrated and diversified business model, given the relatively contained net profit impact from both events. Quarterly / Interim Income Statement (RMm) FY Mar 4Q2016 3Q2017 4Q2017 % chg yoy % chg qoq Revenue Cost of Goods Sold N/A N/A Gross Profit Other Oper. (Exp)/Inc (712) (720) (745) Operating Profit (12.7) Other Non Opg (Exp)/Inc nm nm Associates & JV Inc Net Interest (Exp)/Inc (8.6) (5.7) (10.9) (26.6) (90.6) Exceptional Gain/(Loss) nm nm Pre-tax Profit (18.3) Tax (8.4) (14.3) (13.1) 56.1 (8.5) Minority Interest (3.0) (5.1) (1.3) 56.9 (74.9) Net Profit (15.7) Net profit bef Except (15.7) EBITDA (10.9) Margins (%) Opg Profit Margins Net Profit Margins Source of all data: Company, AllianceDBS Page 3

4 CRITICAL DATA POINTS TO WATCH Critical Factors Integrated food businesses to be resilient. QL has three key segments marine product manufacturing (MPM), integrated livestock farming (ILF) and palm oil activities (POA). As staple protein food products, MPM and ILF product lines enjoy resilient demand. Also, QL s integrated business operations with both upstream and downstream activities provide some cushion against the price volatility of commoditised goods like eggs, feed material and surimi. Surimi, the backbone of MPM. In FY17, QL produced up to 40k MT per annum of surimi ground fish paste whereby 25k MT came from Malaysia (split between plants in Perak and Sabah), and 15k MT from Surabaya, Indonesia. Based on management s estimates, QL commands around 10% market share of surimi in ASEAN. Most of it is sold directly (typically exported), though around half of Malaysian production is used for surimi-based products (SBP) at the Hutan Melintang plant in Perak with a capacity of 55k MT/yr. Together, surimi and SBP make up 60-70% of MPM's revenue and PBT. The remainder comes from its sale of fishmeal (>30k MT/yr), deep-sea fishing, and its relatively new venture into aquaculture or prawn farming. Overall MPM is QL s most profitable division, making up 25-30% of revenue but >50% of pretax as margins are strong at >15%. Solid ILF presence. QL is one of the three largest egg producers in Malaysia, with around 3.3m eggs per day (epd); plus c.1m epd in Indonesia and c.0.85m epd in Vietnam. Its other poultry presence is primarily in East Malaysia, with around 20m day-old chicks (DOC) and 12m broilers. Additionally, it has a production of around 20m DOC/yr in Indonesia. QL also has feedmills supplying its own blended feed to all eight farms; plus a poultry processing house in Sabah with capacity of 4,000 birds per hour. The integrated structure supports relatively steady ILF pretax margins of 5%. In FY17, ILF contributes c.60% to group revenue and >30% to group PBT. Feed material trading. A differentiating factor for QL s ILF division is its feed material trading, primarily involving the import of corn and soybean meal used to mix poultry feed. Trading an estimated >1200k MT/yr of feed material in FY17, QL has a market share of about 20%. It enjoys cost advantages and stability over other pure poultry players, as feed material comprises up to 80% of COGS for layer and boiler operations. This volume-driven business is a significant contributor with up to 60% of ILF revenue and up to 50% of ILF PBT in FY17. POA still needs time. In FY17, QL has c.10k ha of oil palm plantations in Kalimantan, Indonesia, plus three palm oil mills (two in Tawau, Sabah, and one in Tarakan, Indonesia). Due to the young age profile of its trees (1k ha immature, others 4-7 years old), and low CPO prices, the division has been lossmaking. We expect a gradual turnaround as its palms mature to yield more fruit fresh fruit bunches (FFB), and CPO price recovers. Earnings at the pretax level have been held up by its 41.5% stake in Boilermech Holdings, which manufactures biomass boilers. It currently contributes a minimal c.5% of total group PBT. Surimi prod (k MT) Eggs prod (m/day) Own FFB prod (k MT) MPM key indicators and assumptions Total capacity (MT p.a.) FY16 FY17 FY18F FY19F FY20F Surimi 40,000 45,000 45,000 45,000 45,000 Fishmeal 45,000 45,000 45,000 45,000 45,000 Surimi-based products 55,000 55,000 55,000 80,000 80,000 Aquaculture 1,800 1,800 2,813 4,230 5,850 ILF key indicators and assumptions Total production FY16 FY17F FY18F FY19F FY20F Eggs (m/day) DOC (m) Broilers (m) Traded feed material (MT) 980 1,200 1,257 1,320 1,386 ASP (RM) Eggs (ea) DOC (ea) Broilers (/kg) Source: Company, AllianceDBS Page 4

5 Balance Sheet: Solid balance sheet from strong cash flow. QL has a manageable gearing level of <0.5x gross debt-to-equity (0.3x net). Net interest cover is also secure at >8x. Given the strong operating cash generation nature of its businesses, we think that QL would have little trouble gearing up further for any expansion needs. We also forecast QL to continue with a 30% dividend payout, close to its historical trend, though there is no fixed policy. Share Price Drivers: Key product pricing. QL s share price is strongly correlated to the pricing outlook and supply-demand dynamics of its core products like eggs, broilers, surimi and fishmeal. Rising prices from low supply or growing demand may boost its earnings and share price. Capacity expansion or downstream progress. Growing its capacity will increase QL s long-term earnings potential, particularly for core products like surimi and eggs. We believe that further expansion into the higher-margin surimi-based products (SBP), particularly at its Indonesian and Sabah surimi operations, also offers upside potential. Leverage & Asset Turnover (x) Capital Expenditure ROE (%) Key Risks: Feed costs volatility. ILF margins can be affected by higher feed costs (corn and soybeans). But, as a feed material trader, QL has an edge over industry peers with no direct access to the materials. Volatility in prices of commodity products. QL is exposed to risks of falling/weak chicken egg prices, which may be caused by general supply-and-demand forces and seasonality. This could affect ILF margins. On a regional basis, the large supply growth of fishmeal and surimi can also drive down prices and hurt the MPM segment. Company Background QL has three core businesses: ILF integrated livestock farming (chicken eggs, broilers, day-old chicks, feed material trading), MPM marine product manufacturing (surimi, surimi-based products, frozen food), and POA palm oil activities (palm oil plantation, milling). Forward PE Band (x) PB Band (x) Source: Company, AllianceDBS Page 5

6 Key Assumptions FY Mar 2016A 2017A 2018F 2019F 2020F Surimi prod (k MT) Eggs prod (m/day) Own FFB prod (k MT) Segmental Breakdown FY Mar 2016A 2017A 2018F 2019F 2020F Revenues (RMm) MPM ,223 1,343 POA ILF 1,708 1,783 2,057 2,305 2,483 Total 2,853 3,012 3,432 3,967 4,285 Pretax profit (RMm) MPM POA ILF Total Pretax profit Margins MPM POA ILF Total Income Statement (RMm) FY Mar 2016A 2017A 2018F 2019F 2020F Revenue 2,853 3,012 3,432 3,967 4,285 Cost of Goods Sold (2,351) (2,487) (2,854) (3,310) (3,576) Gross Profit Other Opng (Exp)/Inc (232) (243) (255) (267) (280) Operating Profit Other Non Opg (Exp)/Inc Associates & JV Inc Net Interest (Exp)/Inc (32.5) (32.9) (38.5) (40.2) (41.1) Exceptional Gain/(Loss) Pre-tax Profit Tax (47.7) (53.7) (60.9) (74.3) (82.3) Minority Interest (9.7) (10.9) (11.7) (13.6) (14.3) Preference Dividend Net Profit Net Profit before Except EBITDA Growth Revenue Gth (%) EBITDA Gth (%) Opg Profit Gth (%) Net Profit Gth (Pre-ex) (%) Margins & Ratio Gross Margins (%) Opg Profit Margin (%) Net Profit Margin (%) ROAE (%) ROA (%) ROCE (%) Div Payout Ratio (%) Net Interest Cover (x) Source: Company, AllianceDBS Page 6

7 Quarterly / Interim Income Statement (RMm) FY Mar 4Q2016 1Q2017 2Q2017 3Q2017 4Q2017 Revenue Cost of Goods Sold Gross Profit Other Oper. (Exp)/Inc (712) (612) (654) (720) (745) Operating Profit Other Non Opg (Exp)/Inc Associates & JV Inc Net Interest (Exp)/Inc (8.6) (8.8) (7.4) (5.7) (10.9) Exceptional Gain/(Loss) Pre-tax Profit Tax (8.4) (11.5) (14.8) (14.3) (13.1) Minority Interest (3.0) 0.84 (5.4) (5.1) (1.3) Net Profit Net profit bef Except EBITDA Growth Revenue Gth (%) 4.2 (12.9) EBITDA Gth (%) (19.5) (0.4) (10.9) Opg Profit Gth (%) (32.0) (12.7) Net Profit Gth (Pre-ex) (%) (34.2) (15.7) Margins Gross Margins (%) Opg Profit Margins (%) Net Profit Margins (%) Balance Sheet (RMm) FY Mar 2016A 2017A 2018F 2019F 2020F Net Fixed Assets 1,377 1,549 1,675 1,790 1,895 Invts in Associates & JVs Other LT Assets Cash & ST Invts Inventory Debtors Other Current Assets Total Assets 2,804 3,185 3,447 3,758 4,068 ST Debt Creditor Other Current Liab LT Debt Other LT Liabilities Shareholder s Equity 1,588 1,749 1,904 2,095 2,307 Minority Interests Total Cap. & Liab. 2,804 3,185 3,447 3,758 4,068 Non-Cash Wkg. Capital Net Cash/(Debt) (531) (617) (638) (628) (559) Debtors Turn (avg days) Creditors Turn (avg days) Inventory Turn (avg days) Asset Turnover (x) Current Ratio (x) Quick Ratio (x) Net Debt/Equity (X) Net Debt/Equity ex MI (X) Capex to Debt (%) Z-Score (X) 0.0 NA NA NA NA Source: Company, AllianceDBS Page 7

8 Cash Flow Statement (RMm) FY Mar 2016A 2017A 2018F 2019F 2020F Pre-Tax Profit Dep. & Amort Tax Paid (47.7) (53.7) (60.9) (74.3) (82.3) Assoc. & JV Inc/(loss) (12.6) (11.6) (10.7) (11.3) (11.8) Chg in Wkg.Cap. (48.6) (51.6) (54.8) (69.8) (41.5) Other Operating CF Net Operating CF Capital Exp.(net) (236) (288) (250) (250) (250) Other Invts.(net) Invts in Assoc. & JV Div from Assoc & JV Other Investing CF 2.38 (4.0) Net Investing CF (173) (292) (250) (250) (250) Div Paid (53.0) (90.5) (66.8) (81.8) (90.8) Chg in Gross Debt Capital Issues Other Financing CF (12.3) (45.3) Net Financing CF (46.1) 11.8 (16.8) (31.8) (40.8) Currency Adjustments Chg in Cash Opg CFPS (sen) Free CFPS (sen) Source: Company, AllianceDBS Target Price & Ratings History Source: AllianceDBS Analyst: Inani Rozidin Page 8

9 DISCLOSURE Stock rating definitions STRONG BUY - > 20% total return over the next 3 months, with identifiable share price catalysts within this time frame BUY - > 15% total return over the next 12 months for small caps, >10% for large caps HOLD - -10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps FULLY VALUED - negative total return > -10% over the next 12 months SELL - negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame Commonly used abbreviations Adex = advertising expenditure EPS = earnings per share PBT = profit before tax bn = billion EV = enterprise value P/B = price / book ratio BV = book value FCF = free cash flow P/E = price / earnings ratio CF = cash flow FV = fair value PEG = P/E ratio to growth ratio CAGR = compounded annual growth rate FY = financial year q-o-q = quarter-on-quarter Capex = capital expenditure m = million RM = Ringgit CY = calendar year M-o-m = month-on-month ROA = return on assets Div yld = dividend yield NAV = net assets value ROE = return on equity DCF = discounted cash flow NM = not meaningful TP = target price DDM = dividend discount model NTA = net tangible assets trn = trillion DPS = dividend per share NR = not rated WACC = weighted average cost of capital EBIT = earnings before interest & tax p.a. = per annum y-o-y = year-on-year EBITDA = EBIT before depreciation and amortisation PAT = profit after tax YTD = year-to-date Page 9

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