Case Study of QL Resources Berhad (7084)

Overview

QL Resources Berhad is an established Malaysia-based investment holding company founded in the Year 1987 by Dr Chia Song Kun based in Shah Alam, which primarily involved as a leading provider of the agro-good corporation. QL has also successfully become the largest egg producers in Southeast Asia with a production rate of approximately 5.7 million of eggs per day and acts as the largest surimi producers in Asia, who made 50,000 tonnes per year.

QL was listed in ACE Market on 30th March 2000 and successfully transformed into Main Market of Bursa Malaysia on 22nd January 2002. The QL’s replication strategy involves the deployment of technology, capital and management expertise into populous emerging markets and they are focusing on the growth strategy of building up his customers’ food segment. Presently, the company have operations in Malaysia, China, Indonesia and Vietnam.

Ever since QL has grown tremendously. Presently, QL is worth around 11,957 billion in the market capitalisation. Today, it is a homegrown success story in Malaysia. Let’s find out what are the ways lead them to success.

Business Model

QL is a diversified resource and agricultural-based group with three principal core activities such as Integrated Livestock Farming (ILF), Marine Products Manufacturing (MPM) and Palm Oil Activities (POA).

As a leading poultry player in Malaysia, QL distributes animal feed raw materials such as soybean meal and corn, consumer brands as well as operating the broiler and layer farms. For Marine Products Manufacturing, QL engaged in deep-sea fishing aquaculture, manufacturing and sale of fish meal, surimi fish paste and surimi-based products which are widely used in processed food in Asia. The QL’s marine product consumer brands known as Mushroom and Figo, are distributed across Asia, Europe and North America. While for Palm Oil Activities, the group involved in plantations, crude palm oil milling and clean biomass energy.

Financial Review

Based on the past 5 financial years of revenue chart above, the group’s revenue grew years-on-years (y-o-y) from FY2015 (+10.16%), FY2016 (+5.41%), FY2017 (+5.54%), FY2018 (+8.34%) to FY2019 (+10.91%). On a CAGR basis, QL has grown 8.05% based on 5 years. The increase in revenue was mainly attributed to 64% for Integrated Livestock Farming (IFM), 28% for Marine Products Manufacturing (MPM) and 8% for Palm Oil Activities (POA).

QL Resources Berhad has successfully recorded a considerable RM81,283 million increase in gross profit, translating to a double-digit of growth of 13.42% from RM605.5 million in FY2018 to RM686.8 million in FY2019. The increase in gross profit achieved by the upturn in the manufacturing of their marine products (MPM) unit and Integrated Livestock Farming. For examples, the recovery of fish catches, improved prawn aquaculture, completion of new facilities and production output, convenience stores business and regional poultry operations ramping up to meet the global demand have helped the group to buff up its performance.

The Net Profit After Tax (PAT) of QL rose 4.54% from RM215.7 million in FY2018 to a new high of RM225.5 million in FY2019. On a CAGR basis, the Profit After Tax (PAT) grew by 6.22% was in line with the growth of revenue and gross profit.

Cash Flow Statement

The net cash from operating activities decreased from RM303.7 million in FY2018 to RM291.7 million in FY2019 was mainly due to the company was unable to sell out their biological assets (RM20.4 million), inventories (RM196.6 million), and unable to receive money owed by his customers on time (RM9.4 million). The company also have an increase in trade payables (RM50.8 million), contract liabilities (RM14.7 million) and bills payables (RM53.1 million), respectively.

The net cash from investing activities in FY2019 is (-RM296.7 million) was mainly due to the increase of acquisition activities such as investment properties (RM0.216 million), prepaid lease payments (RM0.628 million), Property, Plant & Equipment (PPE) (RM305.7 million) and increase in investment associates (RM1.7 million). The negative cash flow from investing activities indicates that the company is investing more in its business for expansion.

The net cash from financing activities in FY2019 is (-RM35.2 million) was mainly due to the largest number increased in acquisition of non-controlling interest (RM16.5 million), dividends paid for non-controlling interests (RM5.8 million) and owners of company (RM73 million), payment for interest (RM41 million), repayment of finance lease liabilities (RM0.132 million) and terms loans & revolving credit (RM307.1 million).

Does the company able to pay back its liabilities? Based on my computation of liquidity ratio, QL has a current ratio of 1.524 times in FY2019 indicates that the company do not face any liquidity issue as they are capable of paying back its liabilities on due by using current assets such as biological assets, inventories, current tax assets, trade & other receivables, prepayment & other assets, derivative financial assets, cash and cash equivalents amounting to RM1.3 billion.

Prospect and Challenges

QL has set an initial target to open 300 stores of FamilyMart in FY2022. Presently, the group has successfully opened 109 FamilyMart stores and plan to double the number to 170 stores by the end of FY2020. The expansion will be centred at Klang Valley, Melaka, Negeri Sembilan and Johor. (Source: TheEdge, 30Aug2019). The Japanese convenience stores offer a variety range of Ready-To-Eat (RTE) and microwavable meals, soft-served ice-cream and coffee not only attracted the youngster but also the Muslim friends to come over since the FamilyMart’s central kitchen operator known as QL Kitchen Sdn Bhd have received halal certification from the Department of Islamic Development Malaysia in May 2019. (Source: The Malaysian Reserve, 11Nov2019)

For Marine Products Manufacturing (MPM), QL plans to increase the capacity of Hutan Melintang plants in Perak by acquiring more land and investing in automation. The group also plans to increase their current fleet size from 28 boats to 38 boats and increase the aquaculture production capacity from 2,000 tonnes per year to 6,000 tonnes per year within the next five years. (Source: TheEdge, 3 July 2019). The group’s prospect is going forward as there are about 30% of QL’s surimi products are exported with the largest market being the United States, while other markets include Indonesia and China, where QL supplies certain fish balls to hotpot chain HaiDiLao (only in Xi’an) among others. For surimi snacks produced, 60% are exported particularly to South Korea and Japan, where the snacks are consumed with alcoholic beverages. (Source: TheEdge, 22 April 2019)

For Integrated Livestock Farming (ILF), QL plans increase the layer production in Peninsular Malaysia and broiler production in Sabah and Sarawak. (Source: TheEdge, 3 July 2019) While for Palm Oil Activities, the group expects bearish outlook continues in FY2020 mainly due to lower crude palm oil prices. The POA growth potential is expected to be supported by growing palm maturity from Indonesia where it expected to provide higher fresh fruit brunches. (Source: TheEdge, 3 July 2019)

Rating System

Return on Equity (ROE) = Average

Revenue [5 years CAGR] = Average

Net Earnings [5 years CAGR] = Average

Basic Earnings per Share (EPS) [5 years CAGR] = Average

Interest Coverage = Average

My Insight

Based on my calculation on Discounted Earnings Model, QL Resources Berhad has a fair value of RM9.167. The current market value of QL is RM7.37 which is in the range of fair value. (Based on 15Nov2019). QL has a beta of 0.500 (500days) indicates that the company is less volatile than the current market, which indicates that investors/traders are not actively trading in this stock, they may face lower risk. Based on my computation of Compound Annual Growth Rate (CAGR), QL has an expected market return of 6.15%.

In conclusion, QL Resources Berhad has achieved outstanding performance in FY2019 as the revenue, gross profit and net profit after tax have increased based on the years-on-years basis as they are venturing into new markets by collaborating with a big restaurant and China supermarket by supplying surimi-based products, and the expansion of FamilyMart shops in Malaysia. However, an investor or trader must cautious that this company is having limited growth based on its intrinsic value have calculated.

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Written by Stella Goh – Market Data Analyst | 20 November 2019

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