Time to put your eggs in this basket - QL Resources

by **Cals** Wed 10 Jul 2013, 09:59

Time to put your eggs in this basket
Business & Markets 2013
Written by CIMB Research
Wednesday, 10 July 2013 09:43

[b style="line-height: 18px;"]QL RESOURCES BHD [] [/b]
(July 9, RM3.30)
Initiate coverage at RM3.20 with outperform rating and target price of RM4.55: QL, a leading integrated resource-based company involved in fish products, poultry and palm oil, is trading at an undeservedly big discount to other consumer stocks despite its stronger growth prospects and minimal earnings risks.

We expect the stock to be rerated given its substantial discount to the better known consumer names and a refocus from dividend yields to growth as investor sentiment picks up after the general election. We initiate coverage with an “outperform" call and a target price of RM4.55, based on a target 2014 price-earnings ratio (PER) of 20.5 times, after applying a 10% discount to the average consumer sector PER of 23 times 2014. The discount is because: (i) QL is not a direct consumer food and beverage (F&B) play; (ii) its lower dividend yields; and (iii) its smaller market capitalisation.

QL's expansion into egg production in Indonesia and Vietnam is a source of growth as annual per capita consumption is only 70 eggs per year in Indonesia and 50 in Vietnam, low relative to Malaysia's 300. In terms of meat consumption, we highlight that Indonesia also lags behind Malaysia, with a per capita poultry consumption of about 4kg per year, a fraction of Malaysia's 32kg.

Large cap companies such as NESTLE (M) BHD [] and Fraser & Neave Holdings Bhd are trading at 27 to 28 times forward earnings while the brewers, GUINNESS ANCHOR BHD [] and Carlsberg Brewery (M) Bhd, are trading at 22 to 23 times. While we do concede that these companies are more direct consumer F&B plays than QL, and offer fatter dividend yields of 4% to 5%, QL's earnings growth is more attractive at a compound annual growth rate of 16% and earnings downside risk is minimal. We think that it deserves to trade at 19 to 20 times PER. — CIMB Research, July

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This article first appeared in The Edge Financial Daily, on July 10, 2013.