QL RESOURCES BERHAD Analysis Date: (QL) Prepared by: L. C. Chong All figures in thousands of Ringgit Malaysia except per share values and ratios 24/08/2013 Financial Year: 2012 31/03/2012 Latest Quarter: 31/03/2012 Price: 3.42 Stock Category: Large Capital Growing Overview QL Resources Berhad, an investment holding company, engages in marine products manufacturing, integrated livestock farming, and crude palm oil milling activities primarily in Malaysia, Indonesia, Singapore, and Vietnam. The company is involved in deep sea fishing; and manufacturing and selling surimi, which is fish paste, as well as surimi based products and fishmeal. It also engages in the crude palm oil milling and oil palm cultivation activities; owns and manages 3,000 acres of oil palm estate; and operates 40,000 acre under development plantation. In addition, the company distributes animal feed raw materials; and food related products, as well as provides livestock and poultry farming services. Further, it distributes lubricants and food grains, supplements, animal health products, and agricultural products; manufactures and sells meehoon and noodles, frozen halal foodstuff, frozen fish products, and frozen sea food; and sells fresh fruit bunches and markets palm oil products. Additionally, the company is involved in the property holding; layer and broiler farming; and frozen chicken parts wholesale activities. QL Resources Berhad is based in Shah Alam, Malaysia. Board: Main Board FBMKLCI: NO Industry: CONSUMER PRODUCTS Sub Sector: POULTRY FARMING/HATCHERY/BROILER/AQUACUL Ownership: Corporate Owned (Local) Investment Strategy Portfolio Strategy: Lump Sum + Top Up Averaging Down Method: Dollar Cost/Value Averaging Portfolio Execution: Buy and Monitor Basis for Buying & Selling: Institutional Sponsorship Market Direction L. C. Chong Page 1 of 14 http://lcchong.wordpress.com
Financial Performance 25% 20% 15% Sustainable Profitability Rating: Average Measure 3 Y Avg. 5 Y Avg. 3 Y % 5 Y % Consistency ROE 15% 17.37% 18.06% 13.63% 8.82% 12% ROIC 15% 13.46% 13.96% 12.88% 8.68% 13% ROE and ROIC decrease since 2007 even if both are close to my benchmark. The main contributor to this problem is increase of total liabilities, which consists of higher long term debts. 10% 5% 0% 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 ROE 18% 20% 23% 19% 23% 22% 21% 21% 17% 16% ROIC 14% 16% 16% 15% 18% 18% 16% 16% 14% 12% Earnings Growth Quality Rating: Very Good 2,500,000 2,000,000 0.9 1 0.9 0.8 Result YoY % 3 Y % 5 Y % 10 Y % Consistency Revenue 9.54% 13.83% 10.37% 10.47% 97% EPS 0.00% 8.49% 7.45% 2.15% 2% 1,500,000 1,000,000 0.36 0.48 0.48 0.58 0.48 0.54 0.54 0.64 0.64 0.7 0.6 0.5 0.4 Revenue is consistently growing, but growth of EPS is slightly slow or not impressive. The reason of slow growth in EPS is increase of NOSH that dilutes the EPS. 0.3 500,000 0.2 0.1 0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 0 PAR Adjusted EPS Revenue Linear (PAR Adjusted EPS) Linear (Revenue) L. C. Chong Page 2 of 14 http://lcchong.wordpress.com
Healthy Cash Flow 12% 10% 8% 6% 4% 2% 0% 2% 4% 6% 8% 10% 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 CROIC 1% 10% 3% 2% 9% 10% 2% 9% 7% 8% CCC 78 64 66 68 71 66 64 65 64 64 90 80 70 60 50 40 30 20 10 0 Rating: Poor Measure 3 Y Avg. 5 Y Avg. 3 Y % 5 Y % Consistency CROIC 15% 4.61% 3.59% 0.83% 0.40% 10% CCC 64.09 64.21 0.33% 0.70% 36% CROIC is not consistent at all, and CROIC was negative in 2011 and 2012. The reason is extreme high Capex in investing into Indonesia and Vietnam to develop production facilities and open new markets. 200,000 150,000 100,000 50,000 Cash Flow Growth Quality Rating: Average Result YoY 3 Y 5 Y 10 Y Consistency Ops. Cash 28.41% 1.06% 12.60% 16.12% 77% Owner Earnings 99.98% 463.55% 194.90% 48.74% 10% Consistent growth of net operating cash flow, but conversion to free cash flow or owner earnings is rather low. In 2011 and 2012, the owner earnings is negative because of high capex as mentioned before. 0 50,000 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 100,000 Net Ops. Cash Owner Earnings Linear (Net Ops. Cash ) Linear ( Owner Earnings) L. C. Chong Page 3 of 14 http://lcchong.wordpress.com
10% 8% 6% 4% 2% 0% 2% 4% Sustainable Competitive Advantage Rating: Poor Measure 3 Y Avg. 5 Y Avg. 3 Y % 5 Y % Consistency NPM 10% 6.92% 6.83% 3.51% 2.68% 87% FCF/Sales 5% 2.73% 2.21% 0.44% 0.19% 12% Low net profit margin, and poor conversion to free cash flow through the years. I think this industry is very competitive. 6% 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 NPM 3% 3% 4% 5% 6% 6% 6% 7% 7% 7% FCF/Sales 0% 2% 1% 1% 3% 3% 1% 4% 4% 5% Conservative Debt Rating: Poor 250% 200% 150% 100% 50% 0% Measure 3 Y Avg. 5 Y Avg. 3 Y % 5 Y % Consistency DCR 150% 9.04% 7.20% 1.47% 0.68% 11% Debt/Eqty. < 89.61% 92.12% 4.35% 5.66% 78% 100% Quick R. 100% 87.49% 85.25% 10.36% 5.79% 50% QL is highly leveraged in expanding their business to Indonesia and Vietnam. They don't have sufficient free cash flow to cover their debts, but can be covered by assets. Their quick ratio also shows that they may have difficulties to repay short term debts. 50% 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 DCR 1% 9% 4% 3% 13% 14% 3% 15% 14% 15% Debt/Equity 167.54% 193.05% 176.71% 116.33% 107.50% 106.82% 104.90% 98.02% 84.20% 89.84% Quick R. 67% 66% 73% 63% 65% 66% 77% 98% 94% 80% L. C. Chong Page 4 of 14 http://lcchong.wordpress.com
Economic Moats Not available or no moat found Cost Advantage Not available or no moat found Switching Costs Not available or no moat found Network Effect Not available or no moat found Intangible Assets Not available or no moat found Efficient Scale Reference: http://lcchong.files.wordpress.com/2013/07/cp v30 n2 9.pdf L. C. Chong Page 5 of 14 http://lcchong.wordpress.com
Market Timing Discounted Cash Flows Valuation 3 Y 5 Y 10 Y Good 12% Base 8% Bad 4% Ugly 0% Good 12% Base 8% Bad 4% Ugly 0% Good 12% Base 8% Bad 4% Ugly 0% Fair Value 1.06 0.95 0.84 0.74 1.14 0.98 0.83 0.71 1.26 1.01 0.81 0.65 Buy Under 0.73 0.65 0.58 0.51 0.78 0.67 0.57 0.48 0.86 0.69 0.56 0.44 Actual M.O.S. 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Refer Appendix 1 Growth rate applied in Reverse DCF to reach the current stock price (3.42): 8% Refer Appendix 2 EY% Valuation EPS QoQ Growth EY% High EY% Low Buffer R4Q EPS FY14 EPS* FY15 EPS* Jun 12 Sep 12 Dec 12 Mar 13 Jun 13 QoQ % 9.68% 5.79% 10% 0.16 0.20 0.24 0.038 0.044 0.038 0.038 0.042 10.82% Fair Value 2.81 3.46 4.08 Refer Appendix 3 Insider Trading Refer Appendix 4 Buy Under Sell Above (blank) # Securities Price (blank) 0 0.00 Grand Total 0 0.00 1.75 2.15 2.54 2.63 3.24 3.83 Comments Refer Appendix 5 DCF valuation is not applicable for QL. EY% valuation suggests that QL is full valued at this moment. L. C. Chong Page 6 of 14 http://lcchong.wordpress.com
Notes Created Date Details Type Source Type 23/08/2013 Risks The global economic and weather uncertain es. Analysis;Risk Analyst Report Other Points What s going on with POA? We understand from the management that the POA division s swing into the red was due mainly to the lower CPO prices that resulted in lower earnings from the Malaysia s operations which was unable to mi gate the losses from the from its Indonesia opera on which comprises mainly young trees. http://klse.i3investor.com/blogs/kenangaresearch/35337.jsp 23/08/2013 Solid growth in marine division Pretax margins increased by 4.9ppts to 17.5%, attributable to stable fish landing and surimi prices. Pretax margins are likely to be sustainable, as the group con nues to expand its capacity in both Malaysia and Indonesia. Analysis Analyst Report Palm oil division making losses Not affected by US shrimp duty http://klse.i3investor.com/blogs/kltrader/35310.jsp 14/06/2013 Based on Absolute P/E and EY% valuation, it is overvalued now. Note 14/06/2013 Rich cash flow, but the growth is not consistent. So, DCF valuation is not suitable. Note 14/06/2013 The global economic and weather uncertainties. Risk Analyst Report L. C. Chong Page 7 of 14 http://lcchong.wordpress.com
Created Date Details Type Source Type 14/06/2013 Doubling production in surimi and fishmeal production by May this year, we expect this segment to support QL?s growth prospects going forward. Contributing c.45% of group?s earnings going forward, with any unforeseen downfalls that could affect the integrated livestock farming (ILF) and palm oil ac vi es (POA) segments would be sustained by MPM. More to come from marine division. Sales from the marine division grew 15% YoY in FY3/13 but pretax profit escalated 41% YoY on the back of increasing pretax margin (+3 ppt YoY to 15.9%). Doubling of surimi and fishmeal capacity in the Surabaya plant should drive growth in FY3/14 and FY3/15. Margins could be further enhanced by producing surimi based products in Surabaya eventually. Recovery of egg prices. Although livestock revenue increased 16% YoY in FY3/13, pretax profit dropped by 27% YoY, dragged by the weak livestock margins in 2Q 3Q. Our channel checks in early May 2013 showed that egg prices have recovered across all grades, selling at close to ceiling price during festivals. Also, feedmeal prices are lower today. Hence, we are confident that QL s livestock pretax margin could improve further to the normal range of 7 8% from 5.9% in 4QFY3/13. Lower FFB processed. Palm oil revenue declined 5% YoY and 15% QoQ due to lower FFB processed in 4QFY3/13. Overall, pretax profit dropped 27% YoY in FY3/13 mainly due to lower CPO prices which averaged MYR2,600/mt (FY3/12: MYR3,150/mt). Growth in FY3/14 will not be significant yet as QL s 15,000ha land will only be fully planted by FY3/15 (10,000ha planted todate). Reiterate Buy. With the easing of soybean and corn prices, and improvement in livestock margins, QL should see both of this key divisions (including marine) growing faster in FY3/14. We maintain our forecasts, looking at net profit growth of 20% and 16% for FY3/14 and FY3/15 respectively. QL trades at 16x FY3/14 PER, relatively cheaper than other consumer big caps which are trading at 20 21x forward PER. Growth Driver;Outlook Analyst Report 14/06/2013 In the annual report of FY2011, we forecasted FY2012 to be an inflection point year, with slower growth rate. We also Growth Driver;Outlook foresaw FY2013 to be a better year due to the expected significant contribution from regional investments. This latter objective still stands. Although turbulent macroeconomic conditions in FY2013 will make the external environment challenging, we will, barring unforeseen circumstances, still see better contributions from these investments. Annual Report L. C. Chong Page 8 of 14 http://lcchong.wordpress.com
Appendix 1 Discounted Cash Flows Valuation Discount Rate Margin of Safety Average risk premium Average Risk free rate Unadjusted Discount % Business Risk Factor Financial Risk Factor Discount % Initial RRR Dividend Yield Est. EPS Growth Unadjusted MOS Risk Based MOS 7.19% 3.44% 10.63% 1.17 1.18 12.75% 35% 1% 8% 23% 31% Growth Estimation Financial Figures 7 61 75 21 57 Owner Earnings GR. Terminal % Decay Rate (Yr4E Yr7E) Extra Decay (Yr8E Yr10E) Shares Out. FCF Type 2012 Owner Earnings Excess Cash Intangibles Assets Intangibles% add to DCF 8% 3% 15% 20% 832.02 Owner 73.96 101.95 7.59 0% Earnings Projection of Future Free Cash Flow (Base Line 8%) 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 FV 79.87 86.26 93.16 96.22 102.76 109.75 117.21 112.99 119.13 125.61 DPV 748.06 716.52 686.31 628.65 595.45 564.01 534.23 456.71 427.08 399.38 PV 716.96 753.27 788.05 789.91 813.11 835.08 855.88 821.61 832.43 842.55 Fair Value Buy Under (M.O.S. 31%) M.O.S. on Cur. Price (3.42) 3 Y 5 Y 10 Y 0.95 0.98 1.01 0.65 0.67 0.69 0% 0% 0% L. C. Chong Page 9 of 14 http://lcchong.wordpress.com
Projection of Future Free Cash Flow (Good Scenario 12%) 12% 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 FV 82.83 92.77 103.90 109.07 120.20 132.46 145.97 138.52 149.82 162.05 DPV 775.77 770.58 765.43 712.60 696.46 680.69 665.27 559.92 537.11 515.23 PV 747.29 815.07 882.40 897.06 946.87 995.55 1,043.14 990.81 1,018.86 1,045.77 Fair Value Buy Under (M.O.S. 31%) M.O.S. on Cur. Price (3.42) 3 Y 5 Y 10 Y 1.06 1.14 1.26 0.73 0.78 0.86 0% 0% 0% Projection of Future Free Cash Flow (Bad Scenario 4%) 4% 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 FV 76.92 79.99 83.19 84.54 87.41 90.39 93.46 91.67 94.16 96.72 DPV 720.36 664.43 612.85 552.34 506.51 464.50 425.96 370.54 337.57 307.53 PV 686.63 693.62 700.07 691.86 694.01 695.98 697.78 677.45 676.44 675.52 Fair Value Buy Under (M.O.S. 31%) M.O.S. on Cur. Price (3.42) 3 Y 5 Y 10 Y 0.84 0.83 0.81 0.58 0.57 0.56 0% 0% 0% Projection of Future Free Cash Flow (Ugly Scenario 0%) 0% 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 FV 73.96 73.96 73.96 73.96 73.96 73.96 73.96 73.96 73.96 73.96 DPV 692.65 614.30 544.82 483.19 428.54 380.07 337.08 298.95 265.13 235.14 PV 656.30 636.12 618.23 602.36 588.29 575.81 564.74 554.92 546.21 538.49 Fair Value Buy Under (M.O.S. 31%) M.O.S. on Cur. Price (3.42) 3 Y 5 Y 10 Y 0.74 0.71 0.65 0.51 0.48 0.44 0% 0% 0% L. C. Chong Page 10 of 14 http://lcchong.wordpress.com
Appendix 2 Reverse Discounted Cash Flows Discount Rate Margin of Safety Average risk premium Average Risk free rate Unadjusted Discount % Business Risk Factor Financial Risk Factor Discount % Initial RRR Dividend Yield Est. EPS Growth Unadjusted MOS Risk Based MOS 7.19% 3.44% 10.63% 1.17 1.18 12.75% 35% 1% 8% 23% 31% Growth Estimation Owner Earnings GR. Terminal % Decay Rate (Yr4E Yr7E) Extra Decay (Yr8E Yr10E) 8% 3% 15% 20% Financial Figures 7 61 75 21 57 Shares Out. FCF Type 2012 Owner Earnings Excess Cash Intangibles Assets Intangibles% add to DCF 832.02 Owner 73.96 101.95 7.59 0% Earnings Projection of Future Free Cash Flow (GR. 8%) 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Yearly GR. FV 79.87 86.26 93.16 96.22 102.76 109.75 117.21 112.99 119.13 125.61 DPV 748.06 716.52 686.31 628.65 595.45 564.01 534.23 456.71 427.08 399.38 PV 716.96 753.27 788.05 789.91 813.11 835.08 855.88 821.61 832.43 842.55 3 Y 5 Y 10 Y Shares Outstanding 832.02 Fair Value 0.95 0.98 1.01 Desired M.O.S. 31% Buy Under 0.65 0.67 0.69 Current Price 3.42 Actual M.O.S. 0% 0% 0% L. C. Chong Page 11 of 14 http://lcchong.wordpress.com
Appenfix 3 EY% Valuation EY% High EY% Low Buffer R4Q EPS FY14 EPS* FY15 EPS* 9.68% 5.79% 10% 0.16 0.20 0.24 Fair Value 2.81 3.46 4.08 Buy Under 1.75 2.15 2.54 Sell Above 2.63 3.24 3.83 * Estimations from Reuters or local analysts' reports EY% Price High R4Q FY14 FY15 Low Green Zone EY% 9.68% Green Zone Price($) 1.68 2.07 2.44 9.29% Buy Under 1.75 2.15 2.54 10% Trading Range 3.89% 6.18% Sell Above 2.63 3.24 3.83 10% Red Zone EY% 5.79% Red Zone Price($) 2.81 3.46 4.08 Low High L. C. Chong Page 12 of 14 http://lcchong.wordpress.com
Appendix 4 Insider Trading Last 3 months or last 30 insider transactions Transaction Date Securities Holder Type of transaction No of securities Price Transacted L. C. Chong Page 13 of 14 http://lcchong.wordpress.com
Appendix 5 Market Timing Buy Signal No. Method Description 1 EPS QoQ Growth The current quarter's EPS is up more than 15% from the same quarter the year before. 2 DCF Intrinsic Value Price is below Intrinsic Value 3EY % Oscillator Price is below or around the price derived from EY% High 4 Market Direction Stock price breaks out of consolidation/dip on an uptrend. 5 Institutional sponsorship Company owner/directors, EPF, Khazanah, PNB and major fund institutions heavily buying Sell Signal No. Method Description 1 EPS QoQ Growth Quarterly EPS drop for 3 consecutive months. 2 DCF Intrinsic Value Has the stock risen too far from its intrinsic value? 3 Market Direction Long term trend changed from bullish to bearish 4 Institutional sponsorship Company owner, EPF, Khazanah and PNB heavily selling. 5EY % Oscillator Price is above or around the price derived from EY% Low 6 Fundamental Analysis Fundamental of business turns unattractive or bad Declining cash flow Serial charges Serial acquirers The CFO or Auditors leave the company The bills aren t being paid Changes in credit terms and account receivable Found a better opportunity to replace this stock L. C. Chong Page 14 of 14 http://lcchong.wordpress.com