PP 7767/09/2011(028730)

25 October 2010

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

25 October 2010
MARKET DATELINE

QL Resources Share Price

Fair Value
:
:
RM5.08
RM5.50
Expansions To Start Contributing From FY12 Recom : Outperform
(Maintained)
Onwards

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 1,671.7 124.1 31.4 16.6 16.2 31.0 3.5 0.4 23.5 2.1
2012f 1,825.2 139.9 35.4 12.7 14.4 38.0 2.9 0.2 22.0 2.3
2013f 1,965.9 171.9 43.5 22.9 11.7 42.0 2.4 0.1 22.4 3.0
Main Market Listing / Trustee Stock / Syariah Approved Stock By The SC * Consensus Based On IBES Estimates

♦ We recently had a meeting with management to discuss all three of their

Issued Capital (m shares) 395.2
divisions’ developments and prospects.
Market Cap (RMm) 1,600.5
♦ Business model replication in Jakarta and Vietnam. QL is in the midst Daily Trading Vol (m shs) 0.3
of constructing its 13Ha Breeder and 17Ha Layer plant in Cianjur district, 52wk Price Range (RM) 2.42-4.09
located approximately 2 hours from Jakarta. The plant is expected to Major Shareholders: (%)
contribute 12m day old chicks/year by end FY11 and 1m eggs/day by end CBG Holdings Sdn Bhd 47.0
FY12. Similarly in Tay Ninh, Vietnam, QL started construction on its egg Farsathy Holdings 13.4
plant in May of this year. The plant is expected to produce 500k/eggs per
day by end FY12, with similar margins as Malaysia i.e. 24-25 sen/egg
FYE Mar FY11 FY12 FY13
selling price and about 7-8% in PBT margins.
EPS chg (%) - 2.0 5.7
♦ Business model replication in Surabaya. For its MPM division, QL is Var to Cons (%) 1.3 (6.8) 3.6
expecting to complete Phase 1 of its new plant in Surabaya, Indonesia by
March 2011. The Surimi and Fishmeal plant is situated on a 10Ha land, and PE Band Chart
the overall cost would be around RM30-35m. With a capacity of 5k mt of
Surimi and 5k mt of fishmeal, the plant will increase QL’s current capacity
by 20%. As the new plant is expected to be completed by March 2011 (end PER = 15x
PER = 12x
FY11), we believe that it will contribute approximately RM3.4-3.7m PER = 9x
towards FY12-13 EBIT, which we have already previously accounted for in PER = 6x
our forecast.
♦ Plantation in Kalimantan to mature in 2012. QL has finished planted
8,500 ha of land in Eastern Kalimantan around mid of this year. By FY13,
the group aims to finish planting 15k Ha. The 8,500 Ha that was planted is Relative Performance To FBM KLCI
expected to mature in FY13, thus doubling its production from FY12. We
estimate that EBIT from the division would then be approximately
QL Resources
RM32.9m, which we have already accounted for in our forecasts. However,
an upside earnings surprise might come from the POA division as QL is
going into more downstream activities.
♦ Forecasts. After tweaking our ILF assumptions, our FY12-13 earnings are
thus adjusted upwards slightly by 2-6%. FBM KLCI

♦ Risks. 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.
♦ Investment case. Our fair value is raised slightly after the earnings
changes. It is now RM5.50 (RM5.41 previously) based on unchanged target
16x CY11 EPS. We maintain our Outperform recommendation. Hoe Lee Leng
(603) 92802641
Please read important disclosures at the end of this report. hoe.lee.leng@rhb.com.my

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 25 October 2010

Visit Note

We recently had a meeting with management to discuss all three of their divisions’ developments and
prospects. Here are the key takeaways from the meeting:

Integrated Livestock Farming (ILF)

♦ Business model replication in Jakarta. QL is in the midst of constructing its 13Ha Breeder and 17Ha Layer
plant in Cianjur district, located approximately 2 hours from Jakarta. The plant is expected to contribute 12m
day old chicks/year by end FY11 and 1m eggs/day by end FY12. The eggs will be sold locally in Jakarta at ~30
sen/egg, which we estimate would translate to a PBT margin of 6-7%, which is slightly lower than that of
Malaysia of 8%. Its ‘day old chicks’ can be sold at RM1.40-1.50 per chick, with an expected PBT margin of 25-
30%. We expect the operations in Jakarta to contribute about RM3.6m towards EBIT in FY12 and RM12.6m in
FY13, as both its egg and ‘day old chicks’ production move towards full capacity. Note that the egg and ‘day
old chick’ capacity of 1m/day and 12m per year, is Phase 1 of the project, as there is excess land around the
plant for QL to further increase its production capacity in the future (Phase 2), which could potentially come
through by FY14. Note that in terms of capex, Phase 1 would cost a total of RM60-70m. In terms of demand,
the egg consumption in Indonesia is currently low at 80 eggs per person per year vs. Malaysia’s 280 per
person per year, thus providing QL with ample growth opportunities.

♦ Same situation in Vietnam. Similarly in Tay Ninh, Vietnam, QL started construction on its egg plant in May
of this year. The plant is expected to produce 500k/eggs per day by end FY12, with similar margins as
Malaysia i.e. 24-25 sen/egg selling price and about 7-8% in PBT margins. We estimate this will translate to an
EBIT contribution of RM3.0m (9-10%) for FY13. The capacity is Phase 1, and similar to Jakarta, QL will be able
to expand its capacity (Phase 2) as there is ample land around the plant. However, unlike the Jakarta plant,
Vietnam will not be producing ‘day old chicks’. Note that Phase 1 for Vietnam would cost QL a capex of RM25-
35m.

♦ Tweaking our forecasts. Although we have previously assumed the contribution from the new capacity
coming from Indonesia and Vietnam, we are tweaking our assumptions slightly given further clarity on the
expected contributions. We are changing 1) our Indonesia egg production capacity to 1m/day for FY13, from
500k/day previously; and 2) our Indonesia ‘day old chicks’ production to 12m from 10m previously.

Marine Products Manufacturing (MPM)

♦ Business model replication in Surabaya. For its MPM division, QL is expecting to complete Phase 1 of its
new plant in Surabaya, Indonesia by March 2011. The Surimi and Fishmeal plant is situated on a 10Ha land,
and the overall cost would be around RM30-35m. With a capacity of 5k mt of Surimi and 5k mt of fishmeal,
the plant will increase QL’s current capacity by 20%. Unlike the ILF division where the products will be sold
locally i.e. Indonesia, Vietnam and Malaysia, the new plant will be purely capacity expansion as QL will still
export its MPM products to international markets such as Japan. As the new plant is expected to be completed
by March 2011 (end FY11), we believe that it will contribute approximately RM3.4-3.7m towards FY12-13
EBIT, which we have already previously accounted for in our forecast.

Palm Oil Activities (POA)

♦ Plantation in Kalimantan to mature in 2012. QL has finished planted 8,500 ha of land in Eastern
Kalimantan around mid of this year. By FY13, the group aims to finish planting 15k Ha. The 8,500 Ha that was
planted is expected to mature in FY13, thus doubling its production from FY12. We estimate that EBIT from
the division would then be approximately RM32.9m, based on CPO prices of RM2700/tonne, which we have
already accounted for in our forecasts previously. However, an upside earnings surprise might come from the
POA division as QL is going into more downstream activities.

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 25 October 2010

♦ Renewable energy incentives. As previously highlighted, QL’s POA division is aiming to manufacture a zero-
waste palm oil mill system, which will utilise palm oil wastes to be converted into energy. The potential of this
division is clearer given the recent tabling of the Government Budget which extended the application period for
various tax incentives for the usage and production of renewable energy: 1) the generation of energy from
renewable source; 2) energy conservation; and 3) reduction of greenhouse gas emissions. The application
period of all three was extended to 2015. Furthermore, the implementation of the Feed in Tarif (FiT) will be a
core reason for palm oil millers to utilise QL’s zero waste palm oil mill system. FiT will essentially allow
renewable energy producers such as QL to sell the electricity generated to utility companies. Not only will QL
benefit directly from FiT, but indirectly, it will increase the attractiveness and marketability of QL’s zero waste
system. Note that we have not accounted any contribution from this downstream activity given the long
gestation period for any new type of technology to gain commercial acceptance.

Overall

♦ Financing the growth. Based on all three divisions’ expansions combined with existing capex requirements,
we expect QL to require approximately RM250m in capex for both FY11 and FY12. QL’s current cashflow is not
sufficient to finance all these expansions, and it would likely need to gear up further or do a corporate exercise
to raise funds. QL currently has a net gearing of 60% (as at 1QFY03/11), and management has mentioned a
tolerable maximum net gearing level of 80-90%. Besides raising additional debt, we believe the most likely
corporate exercise would be a 10% private placement. Based on QL’s current share price and market
capitalisation, we believe it would be able to raise as much as RM150-200m. For its POA division, we believe
that its capital requirements will partially be financed by the listing of Boilermech of which it has a 40.51%
stake in, slated to be by beginning of 2012.

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. After the tweaking of our ILF assumptions, our FY12-13 earnings are thus adjusted upwards
slightly by 2-6%.

Valuations and Recommendation

♦ Investment case. Our fair value is raised slightly after the earnings changes. It is now RM5.50 (RM5.41
previously) based on unchanged target 16x CY11 EPS. We maintain our Outperform recommendation.

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) (1,338.6) (1,451.1) (1,529.1) ILF 2.8 5.6 13.1
Gross Profit 283.5 333.1 374.2 436.8
EBIT margin (%)
EBITDA 230.5 276.2 317.3 376.6 Marine 15.8 15.7 15.8
EBITDA margin (%) 15.6 16.5 17.4 19.2 Palm oil 6.7 8.7 13.8
ILF 8.8 9.0 9.3
Depr&Amor 40.8 49.7 56.7 63.2 Source: RHBRI
Net Interest (13.1) (19.3) (24.8) (23.6)

Pretax Profit 136.2 158.2 179.7 227.1

Tax (21.5) (23.7) (27.0) (34.1)
Minorities (8.2) (10.4) (12.9) (21.1)
Net Profit 106.4 124.1 139.9 171.9
Source: Company data, RHBRI estimates*

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 25 October 2010

Chart 1: QL Technical View Point

♦ The share price of QL has been trending along the
supportive uptrend on the 10-day and 40-day SMAs
since Mar 2009.

♦ In recent events, the stock rebounded from a mild

profit-taking dip near the 40-day SMA and
surpassed the RM4.66 important level in Sep 2010.

♦ The breakout led to a further rally on the share

price to a fresh all-time high of RM5.11 in mid Oct
2010.

♦ Last Friday, it recorded another positive candle

after a brief consolidation in recent trading.

♦ The bounce, added with the bullish twist on the

momentum indicators, plus the support from the
10-day SMA near RM5.05 suggest a further rally
likely in the near term.

♦ We remain bullish on the stock and foresee a fresh

level to be recorded soon if it surpasses the RM5.10
immediate resistance level this week.

♦ This uptrend will remain firm so long as it can

sustain at above the 40-day SMA near RM4.73 and
near the key resistance-turn-support level of
RM4.66.

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
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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
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may from time to time have an interest in the securities mentioned by this report.

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The research analysts, economists or research associates principally responsible for the preparation of this research report have received compensation based
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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.

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.

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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.

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