PP 7767/09/2010(025354)

08 July 2010

Malaysia Corporate Highlights RHB Research

Institute Sdn Bhd
A member of the
RHB Banking Group
V is it Note Company No: 233327 -M

8 July 2010
MARKET DATELINE

QL Resources Share Price

Fair Value
:
:
RM4.05
RM4.90
Pathway Paved For QL’s Next Growth Phase Recom : Outperform
(Maintained)

Table 1 : Investment Statistics (QL; Code: 7084) Bloomberg: QLG MK

Net Net
FYE Turnover profit EPS Growth PER C.EPS* P/NTA Gearing ROE GDY
Mar (RMm) (RMm) (sen) (%) (x) (sen) (x) (%) (%) (%)
2010a 1,476.7 106.4 26.9 19.2 15.1 - 3.4 0.2 24.2 2.5
2011f 1,671.7 121.3 30.7 14.0 13.2 31.0 2.8 0.4 23.0 2.5
2012f 1,825.2 137.1 34.7 13.0 11.7 38.0 2.4 0.2 21.7 2.8
2013f 1,965.9 162.3 41.1 18.4 9.9 42.0 2.0 0.1 21.5 3.5
Main Market Listing / Trustee Stock / Syariah Approved Stock By The SC * Consensus Based On IBES Estimates

♦ Indonesia plantation earnings to start contributing by FY11. QL’s Issued Capital (m shares) 395.2
74.5%-owned plantation is expected to start contributing more Market Cap (RMm) 1,600.5
meaningfully to the plantation division (>60% of plantation earnings) by Daily Trading Vol (m shs) 0.3
FY13 arising from the maturing age profile of its plants and additional 52wk Price Range (RM) 2.42-4.09
milling profits from the operation of its CPO mill in Indonesia (3rd CPO mill Major Shareholders: (%)
CBG Holdings Sdn Bhd 47.0
for the group), which is expected to be completed by Dec 2011.
Farsathy Holdings 13.4
♦ Enlarging its egg basket. Currently producing 2.5m eggs/day, QL
targets to enlarge its eggs product to 4.0m eggs/day (+60%) by FY13.
FYE Mar FY11 FY12 FY13
This would come from its expansion plans in Malaysia (+0.5m (+20%) in EPS chg (%) (1.2) (5.0) (0.1)
FY11), Indonesia (+0.5m (+20%) in FY12) and Vietnam (+0.5m (+20%) Var to Cons (%) (1.0) (8.7) (2.2)
by end-FY12). We are overall positive on the overseas integrated lifestock
farming (ILF) ventures given: 1) the large population size in Indonesia and PE Band Chart
Vietnam of 227m and 86m respectively vs. Malaysia’s 27m; and 2)
potential increase in egg consumption in both Indonesia and Vietnam, as
increase in urbanisation takes place given its current low consumption of PER = 12x
PER = 9x
only 50 eggs per person p.a. vs. Malaysia’s 280 eggs per person p.a.. PER = 6x

♦ New surimi plant in Indonesia. QL started the construction of its new

surimi plant on a 10ha land in Surabaya, Indonesia in Apr 2010. The new
plant has 2 lines with a total initial capacity of 5,000mt p.a.. Earnings
contribution from this new plant is expected to come in by early-FY12. Relative Performance To FBM KLCI

♦ Forecasts. Our earnings forecasts have been reduced by 0.1-5.0% in

FY11-13 after: 1) tweaking our earnings model; 2) assuming earnings for QL Resources
the Indonesia and Vietnam operations to only come in by mid- to end-FY12
instead of early-FY12 previously; and 3) increasing our capex assumptions
to RM200m (from RM150m) in FY11 and RM150m (from RM140m) in FY12 FBM KLCI
following management’s higher guidance. We maintain our capex
assumption at RM150m in FY13.

♦ Risks. The risks include: 1) decline in consumer spending power; and 2)

intensifying competition.

♦ Investment case. In our view, QL’s proven track record, together with
its staple food-based business, offers investors resilient earnings that
would be able to withstand economic downturns and recessions. Our fair Hoe Lee Leng
value has now been increased to RM4.90 (from RM4.60) based on higher (603) 92802239
PER target of 14.5x CY11 (from 13x CY11), to be in line with the consumer hoe.lee.leng@rhb.com.my
sector target PER.

Please read important disclosures at the end of this report.

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 8 July 2010

Visit Note

♦ Pathway paved for medium- to long-term growth. QL has set its foundations to ensure that it will
continue to grow both its revenue and profitability in the medium to long term, through the expansion of its
three major divisions, namely marine products manufacturing (MPM), intergrated livestock farming (ILF) and
palm oil activities (POA). These expansion plans will be mainly targeted at QL’s overseas operations i.e.
Vietnam and Indonesia. In the past 10 years, QL grew its revenue and PBT by a CAGR of 14% p.a. and 21%
p.a. respectively. We understand that management intends to grow its profitability by the same quantum for
the next 10 years.

Chart 1: Turnover CAGR FY00-10 and FY11-13f

2000
1800
CAGR = 14%
1600 POA MPM ILF
1400
1200
RM'm

1000
800
600
400
200
0
FY00

FY01

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11f

FY12f

FY13f
Source: Company, RHBRI

Chart 2: PBT CAGR FY00-10 and FY11-13f

250

200 POA MPM ILF

CAGR = 21%
150
RM'm

100

50

0
FY00

FY01

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11f

FY12f

FY13f

Source: Company, RHBRI

♦ Indonesia plantation earnings to start contributing by FY11. Based on our CPO price assumption of
RM2,550/t in FY11, we expect QL’s 74.5%-owned plantation, PT Mutiara Indah in East Kalimantan, to start
contributing positively to the group’s net profit by FY11, albeit at a minimal level. However, we only expect the
Indonesian plantation to contribute more meaningfully to the plantation division (>60% of plantation earnings)
by FY13 arising from the maturing age profile of its plants and additional milling profits from the operation of
its CPO mill in Indonesia (3rd CPO mill for the group), which is expected to be completed by Dec 2011.

♦ Enlarging its egg basket. Currently producing 2.5m eggs/day, QL targets to enlarge its eggs product to
4.0m eggs/day (+60%) by FY13. This would come from its expansion plans in Malaysia (+0.5m (+20%) in
FY11), Indonesia (+0.5m (+20%) in FY12) and Vietnam (+0.5m (+20%) by end-FY12). Both its Indonesia
and Vietnam ILF plants have sufficient space to double up its capacity if need be, which we believe QL may
carry out by FY14-15 if the operations are successful. We are overall positive on the overseas ILF ventures
given: 1) the large population size in Indonesia and Vietnam of 227m and 86m respectively vs. Malaysia’s

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 8 July 2010

27m; and 2) potential increase in egg consumption in both Indonesia and Vietnam, as increase in urbanisation
takes place given its current low consumption of only 50 eggs per person p.a. vs. Malaysia’s 280 eggs per
person p.a.. We have already included the Indonesia and Vietnam ILF operations into our forecasts.

♦ New surimi plant in Indonesia. QL started the construction of its new surimi plant on a 10ha land in
Surabaya, Indonesia in Apr 2010. The new plant has 2 lines with a total initial capacity of 5,000mt p.a..
Earnings contribution from this new plant is expected to come in by early-FY12. For the Malaysian operations,
while the media has reported that the Government does not intend to remove the diesel subsidy for local
fishermen, we understand that the Government may relook into the subsidy system and may set in place
additional requirements for the fishermen to qualify for the subsidy or to modify the system altogether to be
based on the volume of catch instead. This modification is needed to reduce the abuse of the current diesel
subsidy system. If this does happen, we believe that QL will benefit given that it would now have greater
supply of catch for its operations. Globally, the demand of fish outstrips supply, given: 1) increase in global
population; 2) higher demand from developing countries due to greater wealth; and 3) fish supply is
dependent on external factors such as weather conditions and pollution. As such, we do not believe there will
be an oversupply situation for QL’s MPM division. We have already included the Indonesia MPM operations into
our forecasts.

Risks

♦ Risks to our view. The risks include: 1) significant drop in demand; 2) significant increase in raw material
prices; 3) significant change in CPO price trend; 4) foreign exchange risk; and 5) aggressive growth that may
strain its balance sheet.

Forecasts and Assumptions

♦ Forecasts. Our earnings forecasts have been reduced by 0.1-5.0% in FY11-13 after: 1) tweaking our
earnings model; 2) assuming earnings for the Indonesia and Vietnam operations to only come in by mid- to
end-FY12 instead of early-FY12 previously; and 3) increasing our capex assumptions to RM200m (from
RM150m) in FY11 and RM150m (from RM140m) in FY12 following management’s higher guidance. We
maintain our capex assumption at RM150m in FY13.

Valuations and Recommendation

♦ Investment case. In our view, QL’s proven track record, together with its staple food-based business, offers
investors resilient earnings that would be able to withstand economic downturns and recessions. Our fair value
has now been increased to RM4.90 (from RM4.60) based on higher PER target of 14.5x CY11 (from 13x CY11),
to be in line with the consumer sector target PER.

Table 2: Earnings Forecasts Table 3: Forecasts Assumptions

FYE Mar (RMm) FY10 FY11f FY12f FY13f FYE Mar FY11F FY12F FY13F

Turnover 1,476.7 1,671.7 1,825.2 1,965.9 Revenue growth (%)

Turnover growth (%) 5.6 13.2 9.2 7.7 Marine 13.8 17.2 9.6
Palm oil 5.6 11.2 21.6
Cost of Sales (1,193.2) (1,342.2) (1,454.9) (1,541.9) ILF 2.8 3.6 7.2
Gross Profit 283.5 329.5 370.4 424.0
EBIT margin (%)
EBITDA 230.5 272.6 313.5 363.8 Marine 15.8 15.7 15.8
EBITDA margin (%) 15.6 16.3 17.2 18.5 Palm oil 6.7 8.7 13.8
ILF 8.8 8.8 8.7
Depr&Amor 40.8 49.7 56.7 63.2 Source: RHBRI
Net Interest (13.1) (19.2) (24.6) (23.1)

Pretax Profit 136.2 154.7 176.1 214.8

Tax (21.5) (23.2) (26.4) (32.2)
Minorities (8.2) (10.1) (12.6) (20.3)
Net Profit 106.4 121.3 137.1 162.3
Source: Company data, RHBRI estimates*

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 8 July 2010

Chart 3: QL Technical View Point

♦ Since Mar 2009, the share price of QL has been
trending along the supportive UTL.

♦ But, when the stock met with a strong resistance

level at RM3.50 in Jan 2010, it started a sideways
consolidation phase, fluctuating between a support
of RM3.20 and a resistance level of RM3.50.

♦ It broke out the resistance in Apr 2010, before

pushing its uptrend across another tough resistance
level at RM3.94 in Jun.

♦ However, it has been congesting near the RM3.94 –

RM4.06 region in recent weeks, suggesting a
likelihood of stronger selling pressure to emerge in
the near term.

♦ Nevertheless, we are of the view that so long as it

can sustain at above the RM3.70 level, near the
UTL, and the 40-day SMA near RM3.81, its uptrend
will remain intact.

♦ Losing the UTL will mark a derailment of the

Uptrend towards the RM3.20 - RM3.50 support
region.

♦ On the upside, it will return to bullishness if it

removes RM4.06 immediate resistance level. That
will propel the stock to an uncharted territory.

IMPORTANT DISCLOSURES

This report has been prepared by RHB Research Institute Sdn Bhd (RHBRI) and is for private circulation only to clients of RHBRI and RHB Investment Bank
(previously known as RHB Sakura Merchant Bankers). It is for distribution only under such circumstances as may be permitted by applicable law. The opinions
and information contained herein are based on generally available data believed to be reliable and are subject to change without notice, and may differ or be
contrary to opinions expressed by other business units within the RHB Group as a result of using different assumptions and criteria. This report is not to be
construed as an offer, invitation or solicitation to buy or sell the securities covered herein. RHBRI does not warrant the accuracy of anything stated herein in any
manner whatsoever and no reliance upon such statement by anyone shall give rise to any claim whatsoever against RHBRI. RHBRI and/or its associated persons
may from time to time have an interest in the securities mentioned by this report.

This report does not provide individually tailored investment advice. It has been prepared without regard to the individual financial circumstances and objectives
of persons who receive it. The securities discussed in this report may not be suitable for all investors. RHBRI recommends that investors independently evaluate
particular investments and strategies, and encourages investors to seek the advice of a financial adviser. The appropriateness of a particular investment or
strategy will depend on an investor’s individual circumstances and objectives. Neither RHBRI, RHB Group nor any of its affiliates, employees or agents accepts
any liability for any loss or damage arising out of the use of all or any part of this report.

RHBRI and the Connected Persons (the “RHB Group”) are engaged in securities trading, securities brokerage, banking and financing activities as well as providing
investment banking and financial advisory services. In the ordinary course of its trading, brokerage, banking and financing activities, any member of the RHB
Group may at any time hold positions, and may trade or otherwise effect transactions, for its own account or the accounts of customers, in debt or equity
securities or loans of any company that may be involved in this transaction.

“Connected Persons” means any holding company of RHBRI, the subsidiaries and subsidiary undertaking of such a holding company and the respective directors,
officers, employees and agents of each of them. Investors should assume that the “Connected Persons” are seeking or will seek investment banking or other
services from the companies in which the securities have been discussed/covered by RHBRI in this report or in RHBRI’s previous reports.

This report has been prepared by the research personnel of RHBRI. Facts and views presented in this report have not been reviewed by, and may not reflect
information known to, professionals in other business areas of the “Connected Persons,” including investment banking personnel.

The research analysts, economists or research associates principally responsible for the preparation of this research report have received compensation based
upon various factors, including quality of research, investor client feedback, stock picking, competitive factors and firm revenues.

The recommendation framework for stocks and sectors are as follows : -

Stock Ratings

Outperform = The stock return is expected to exceed the FBM KLCI benchmark by greater than five percentage points over the next 6-12 months.

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Trading Buy = Short-term positive development on the stock that could lead to a re-rating in the share price and translate into an absolute return of 15% or more
over a period of three months, but fundamentals are not strong enough to warrant an Outperform call. It is generally for investors who are willing to take on
higher risks.

Market Perform = The stock return is expected to be in line with the FBM KLCI benchmark (+/- five percentage points) over the next 6-12 months.

Underperform = The stock return is expected to underperform the FBM KLCI benchmark by more than five percentage points over the next 6-12 months.

Industry/Sector Ratings

Overweight = Industry expected to outperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Neutral = Industry expected to perform in line with the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Underweight = Industry expected to underperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

RHBRI is a participant of the CMDF-Bursa Research Scheme and will receive compensation for the participation. Additional information on recommended
securities, subject to the duties of confidentiality, will be made available upon request.

This report may not be reproduced or redistributed, in whole or in part, without the written permission of RHBRI and RHBRI accepts no liability whatsoever for the
actions of third parties in this respect.

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