Catch this laggard

Business & Markets 2013
Written by Maybank IB Research
Wednesday, 08 May 2013 10:57
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QL RESOURCES BHD []
(May 7, RM3.13)
Maintain buy at RM3.07 with a target price of RM3.50: Higher
production cost and the depressed selling prices of eggs in Peninsular
Malaysia have spoilt an otherwise decent 2013 financial year ended
March (FY13). Given the improvement in average selling price of eggs
and lower feed costs, as well as higher earnings contribution from its
marine division expansion, we expect the group to chart a stronger net
profit growth of 20% year-on-year (y-o-y) for FY14. Maintain “buy” with
a discounted cash flow-based target price (TP) of RM3.50 which
implies 16.4 times FY14 price-earnings ratio. QL is a laggard in the
consumer space with its share price down 4.7% year-to-date relative to
the FBM KLCI. With the resumption in stronger earnings growth, the
stock is due to rerate.
Our channel checks in the major grocery stores in northern and central Peninsular Malaysia show that egg prices have
recovered across all grades. Eggs are now selling at close to their ceiling prices during festivals. Hence, we believe the
oversupply situation has ended. Coupled with the retracement in raw material (feed meal) prices, pre-tax margin should
recover in the first quarter (1Q) of FY14 to 8%.
To recap, the livestock division suffered lower pre-tax margins of 5.6% in 2QFY13 and 3.2% in 3Q, while pre-tax profit for the
division dropped 32% and 60% y-o-y.
The H7N9 virus, meanwhile, has infected more than 125 people globally so far. Approximately 20% have died, 20% have
recovered and the rest are still being treated.
There is no evidence of human transmission yet. Malaysia has joined Vietnam and Indonesia in banning all poultry products
from China, effective April 23, after the first case of human infection with H7N9 was reported in Shandong. This should have
no impact on demand affecting QL’s livestock farming.
With the reduction in chicken consumption and culling of birds, especially in eastern China, the country has lowered its
soybean imports due to lower feed demand.
However, unseasonal rains in large parts of the US Midwest could defer planting. To date, the soybean price remains stable
at US$1,450 per bushel (RM4,306.50 per cu decimetre) and corn at US$650 per bushel. We make no change to our earnings
forecasts, we expect the group to chart 16% to 20% net profit growth in FY14 and FY15. — Maybank IB Research, May 7