Wednesday, May 30, 2012

QL ... May12

ZJ Research ...

4QFY12 Results Review

• QL’s steady and consistent results steered the Group to yet another brilliant record year with
FY12 net profit hitting RM132.1 mln on the back of RM1.95 bln revenue. The results were within
our expectations.

• FY12 revenue grew 9.6% y-o-y on improved sales from across all business divisions, i.e. the
Marine Products Manufacturing (MPM), Palm Oil Activities (POA) and Integrated Livestock
Farming (ILF). Profitability-wise, the MPM segment posted a marginal PBT decline of 3.0% y-oy,
but this was more than offset by higher contributions from the remaining two divisions.

• To recap, the drop in MPM’s FY12 PBT was owing to poor fish catch in 1HFY12 that affected
overall divisional performance. Nevertheless, QL managed to grow the top line by 5.2% y-o-y
following higher sales of surimi-based products in Malaysia, as well as maiden contribution from
the surimi plant in Indonesia, which has commenced commercial production since July 2011.
MPM’s FY12 PBT margin, at 13.0%, remains the highest in the Group.

• Meanwhile, stronger CPO prices, averaging RM3,150/mt in FY12 vs. RM3,000/mt in FY11
pushed POA’s PBT up by 147.7% y-o-y to RM13.1 mln in the financial year under review. Still,
this division remains the smallest in the Group, having contributed only 18.2% and 7.6% to
consolidated revenue and PBT respectively. PBT margin for POA, at 3.7%, is the also leanest
in FY12 by comparison to the other divisions.

• The largest revenue and profit contributor, the ILF division posted a 12.5% and 6.6% y-o-y rise
in revenue and PBT respectively, on higher farm product prices and higher unit price of animal
feed raw materials. We note that the lower-than-proportionate growth in PBT profit was a result
of lower profit margin from the trading of feed raw materials, plus the initial start-up losses
incurred in its Vietnam layer farm.

• At Group level, FY12 net profit margin was marginally lower at 6.8% vs. 7.0% in FY11. Effective
tax rate was higher at 19.3% by comparison to 15%-17% in the past two years. We understand
from management this was due to expiration of certain pioneer statuses that some subsidiaries
enjoyed earlier. Going forward, we expect the effective tax rate to be in the region of 20%.
Meanwhile, on balance sheet strength, net gearing remained relatively stable at 0.61x as at
end-March 2012, supported by a BV per share of 98 sen.

• After imputing a higher effective tax rate of 20%, our FY13 earnings estimate is now reduced
marginally to RM152.5 mln (-4%). Despite the reduction, the projection still reflects a good 15%
y-o-y increase in net profit. We believe this is achievable on the notion that FY13 would be a
growth year following a consolidation year in FY12. Management focused its attention on a
number of overseas investments in FY12, and these ventures incurred initial start-up costs that
were expensed out, resulting in the lower net profit growth in FY12. Things are set to improve in
FY13 when the operations abroad stabilize and revenues are kicking in.

• In Indonesia, the surimi operations are already profitable, and management is increasing
capacity of by another 5,000 mt/year, which is slated for completion by September 2012. It is
also building a surimi-based production facility in Hutan Melintang with a targeted output of
10,000 mt/year. The products are targeted for export to China as well as other Western
countries. Elsewhere, QL’s other minor capex involves setting up a new frozen fish coldroom in
Endau and a new surimi-based coldroom in Johor Bahru, for a combined investment of RM11
mln.

• Meanwhile, on the ILF projects, the layer farm in Indonesia is currently producing 350,000
eggs/day with the aim of increasing it to 900,000 eggs/day by March 2013. As for the
Indonesian breeder farm, the current output is 1.3 mln Day-Old-Chicks (DOC)/month with plans
to raise it to 2.5 mln DOC/month by March 2013. In Vietnam, QL operates a layer farm that
produces 200,000 eggs/day at present, with the target output of 300,000 eggs/day by March
2013.

• As for the Group’s oil palm plantation in Kalimantan, approximately 10,000 hectares have been
planted, with completion of planting expected in FY14 for all the 15,000 hectares of land. Its
newly built CPO mill which boasts an annual capacity of 400,000 mt has also commenced
operation but current utilization is still relatively insignificant as it awaits the oil palm trees to
mature and produce more Fresh Fruit Bunch.

• The board has recommended a final single-tier dividend of 4.5 sen for FY12, subject to
shareholders’ approval at the upcoming AGM. We note there is a slight increment over FY11’s
dividend of 4.25 sen.

Recommendation
We reiterate our Buy recommendation on QL with an unchanged fair value of RM3.60, derived from
ascribing a peer-benchmarked EV/EBITDA multiple of 14x. We continue to like QL for its i) highly
capable management who has led the Group’s outstanding double-digit revenue and net profit growth
over the last decade; ii) double-digit earnings growth in FY13 (even after trimming our projections); iii)
healthy fundamentals; and iv) new income streams from its overseas ventures.

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