CFA IRC-Sunway University Team (2013)

1
hosted by
CFA Malaysia

Sunway University

1
Sunway University Student Research Consumer I ndustry
This report is published for educational purposes only
by students competing in the CFA Institute Research
Challenge.

Highlights

Fundamentals and valuations indicating a convincing BUY: We have derived a
fair value of RM3.86 for QL, which represents an upside of 22% from current level.
With its involvement in resilient consumer businesses, strong earnings growth
prospects well supported by strong financial fundamentals and aggressive
expansions, we believe the current valuations are still relatively undemanding as
the exciting future prospects have yet to be priced in.

Recession-proof food-based business segments underpins resilient earnings:
Fundamentally, QL sells defensive products, being basic staple food items such as
eggs, broilers, surimi and oil palm which are less vulnerable to the current market
uncertainties. Despite the outbreak of the avian influenza disease and sub-prime
mortgage crisis in FY09, QL recorded a significant PBT growth of 14.7%, once
again demonstrating its remarkable earnings resilience. Going forward, the
increasing significance of palm oil plantation business would add to the resilience
of core earnings. With the current market uncertainties, QLs well diversified and
highly sustainable business model would be, therefore, appealing to investors
seeking for low-beta exposure.

Exciting earnings growth prospects: Since its inception in 1987, QL has never
failed to deliver and this is reflected in its continuing revenue growth over the
years. In the recent three years, earnings have grown steadily with a CAGR of
about 11% since FY10. We believe QL is set to enter into a new phase of exciting
and sustainable growth. Based on our projections, we estimate a 3-year earnings
CAGR of 14.5% starting from FY12 while FY15 onwards shall see the fruition of
its current expansion plans across all three industry segments.

Tapping the Asian consumption growth story: Apart from its entrenched
dominant position in its home country, QLs increasing geographical exposure in
Southeast Asia, especially Indonesia is highly strategic in our view. QL has been
aggressively expanding its production and manufacturing operations in Indonesia
over the years and we are convinced on the rationale of such moves. Export
growth potential to Indonesia is massive as it is the largest economy in Southeast
Asia. Coupled with the strong GDP growth and expanding middle class, these will
be key engines for consumption growth as per capita income rises, which should
bode well for early movers such as QL.

Ticker: QLG MK Recommendation: BUY
Price: RM3.16 Price Target: RM3.86
In RM million-FYE March FY10 FY11 FY12 FY13F FY14F FY15F
Total Revenue 1,476 1,777 1,947 2,131 2,319 2,654
EBITDA 188 225 249 300 333 383
Net Income 107 125 131 154 173 204

In RM
Earnings per Share 0.14 0.15 0.16 0.19 0.21 0.25
Book Value per Share 0.71 0.96 1.06 1.22 1.38 1.57
Dividend Yield (%) 1.7%

1.1%

1.3%

1.5%

1.5%

1.5%
Return on Equity (%) 20.6% 16.7% 15.8% 15.9% 15.8% 16.5%
Return on Assets (%) 10.4% 9.1% 8.3% 8.4% 8.3% 8.9%

Market Profile
52 Week Price Range(RM) 2.84 -3.40
Average Daily Volume 132,300
Beta 0.8
Dividend Yield 1.44%

Share Outstanding (Shares) 832m
Market Capitalization(RM) 2.6bn

Book Value per Share(RM) 1.1
Debt to Total Capital 46.8%
Return on Equity 15.8%

Major Shareholders(%)
CBG Holdings Sdn. Bhd. 44.9%
Farsathy Holdings SD 12.9%
QL Resources Bhd
Source: Company data and teams estimates
Date: 2 November 2012
1000
1100
1200
1300
1400
1500
1600
1700
2.00
2.20
2.40
2.60
2.80
3.00
3.20
3.40
3.60
Sep 30
2011
Jan 31
2012
May 31
2012
Sep 30
2012
QL's Share Price & KLCI index
QL KLCI
Source: Company data
Source: Bloomberg
RM
CFA Institute Research Challenge 2013 2 November 2012

2

3.3%
3.6%
6.7%
7.2%
0%
1%
2%
3%
4%
5%
6%
7%
8%
2012 2013
World Developing Asia
Business Description
QL Resources Berhad is a leading Malaysian agricultural based group. Founded in
1987 as a small scale integrated livestock business, it has come a long way to
evolve into one of the Malaysia's largest integrated resource-based food agriculture
companies with a market capitalization of RM2.6bn. Headquartered in KL, QL was
first listed on March 2000 and currently operates in three principal activities,
namely Integrated Livestock Farming, Marine Products Manufacturing and Palm
Oil Activities. Dr Chia Song Kun is the founder as well as the Managing Director
of the company. Currently, Dr Chia holds 46% direct and indirect stake in QL.
Integrated Livestock Farming Activities (ILF)
Organic growth and a series of strategic acquisitions has driven QLs rise to
become one of the largest poultry egg producers and animal feed raw materials
distributors in Malaysia. It is also a leading integrated broiler and Day Old Chicks
(DOC) producer in East Malaysia. It currently operates eight commercial farms
across Malaysia, Indonesia and Vietnam.
Marine Products Manufacturing Activities (MPM)
Apart from livestock farming, QL has also diversified into the fisheries sector
through the development of a marine-based manufacturing chain. Starting with
fishmeal and working up to higher-value surimi, it now conducts full upstream &
downstream activities including surimi, surimi-based products manufacturing,
fishmeal and deep sea fishing.

Through the use of innovative technology and quality practices, QL has achieved
industry leadership positions whereby it is currently the largest producer of surimi
in Asia as well as the top fishmeal and surimi-based products manufacturer in
Malaysia. QLs marine products are distributed nationwide and internationally to
more than 15 countries through a wide distribution network under both a private
label as well as QLs portfolio brand such as Mushroom, Figo etc.
Palm Oil Activities (POA)
Closely related to its agricultural base, QL has expanded its capabilities in palm oil
from milling to estate ownership and management. It currently owns three
independent Crude Palm Oil (CPO) mills and two palm plantations, including a
1,200 ha mature palm oil estate in Sabah and another 20,000 ha plantation under
development in Eastern Kalimantan, Indonesia.

Further expansion along the value chain has been achieved with the
commercialization of zero-waste renewable energy projects. QL has also developed
a first of its kind integrated biomass boiler technology, whereby palm biomass is
processed by biogas power plants within the palm oil milling complexes. All these
efforts are expected to result in future cost savings in QLs operations.

Industry Overview

Resilient Asia in the unstable global economic outlook
In the latest July World Economic Outlook (Fig 2), the International Monetary
Fund (IMF) painted a gloomy picture of world economy and trade with a forecast
of 3.3% global GDP growth in 2012 and 3.6% in 2013. However, in Developing
Asia which mainly consists of China, India and the ASEAN-5, IMF projected a 6.7%
growth in 2012 before improving to 7.2% in 2013. While the Asian market is
unlikely to be insulated from the economic volatility, it is expected to fare better in
such difficult times.

Although QL is heavily involved in exports, its main markets are within the
Developing Asia countries and Japan which should be less affected by the global
economic headwinds. In addition, its main involvement in staple food industry is
less cyclical and the demand is expected to be more stable regardless of the state of
economy.

Rising eggs and broiler demand
The demand for eggs has been rising over the years since it is considered the
cheapest source of protein. Research suggests that per capita egg consumption in
Malaysia is one of the highest in the world, averaging around 320 eggs per person
per year, 3.2x higher than that of Indonesia and 4.5x of Vietnam. Therefore, as per
QL
Resources
Bhd
Integrated
Lifestock
Farming (ILF)
Animal feed
Eggs
Broiler
DOC
Marine
Product
Manufacturing
(MPM)
Surimi
Surimi-based
products
Fishmeal
Deep sea
fishing
Palm Oil
Activities
(POA)
Palm
plantation
CPO milling
Palm biomass
Fig 1: Main business segments
Fig 2: GDP Growth Forecast
Source: IMF July World Economic Outlook

3

0
5
10
15
20
25
30
35
40
2
0
0
1

2
0
0
2

2
0
0
3

2
0
0
4

2
0
0
5

2
0
0
6

2
0
0
7

2
0
0
8

2
0
0
9

2
0
1
0

2
0
1
1

2
0
1
2

K
G

Vietnam Indonesia
Malaysia
3 = Least favourable to QL
1 = Most favourable to QL
Source: indexmundi.com
Source: Team Analysis
capita income rises, egg consumption in these countries is expected to increase
accordingly.
With the Indonesian government targeting to double the chicken and egg
consumption of Indonesians in the coming three years, any related measures shall
provide significant upside on demand for these products considering the population
mass in Indonesia. This is highly positive for QL which has been expanding its
operation in Indonesia aggressively.
The steady animal feed industry in Malaysia
Corn and soybean meal form 80-85% of animal feed by weight. Therefore, they
are the main drivers of feed prices and trading margins. Due to insufficient
domestic production, Malaysia imports more than 90% of its corn requirement
from other countries such as Argentina and the United States.
Animal feed industry in Malaysia contributed a total revenue of RM213.5million in
2010. As a relatively matured market, it is expected to maintain a consistent growth
performance. Given the steady historical growth trend, its revenue is likely to hit
RM291.1million by 2015 representing a CAGR of 6.4% over the next five years.
The demand and supply mechanism of the surimi market
The world demand for surimi currently stands at around 600,000 metric tonnes (mt),
growing at 5% p.a. on average. Japan has been the largest consumer in the worlds
surimi market, with an estimated annual consumption of 320,000mt. Meanwhile,
China has emerged as a new growing consumer due to its nationwide popularity in
steamboat products.
Given the demand and supply mechanism, the pricing of the surimi products has
remained stable over the years, and we believe that the rising demand from the
regional countries will continue to hold up the surimi prices.
The supply of surimi products amounted to 315,800mt in the Southeast Asian
region in 2005. QL is the biggest manufacturer in Malaysia, producing about
32,000mt of surimi products per year, and garnering a domestic market share of
50%. Although Indonesia has the largest sea area of almost 1.89 million square
metres in the region thus providing abundant fishery resources to be used as raw
materials for surimi processing, there are only 8 processing plants currently
running in the country. This is a strong indication that the potential of this industry
in Indonesia remains largely untapped, and QLs expansion in setting up
processing plants in Indonesia is strategic and should bode well for the future.
Increasing palm oil influence
The global palm oil production had doubled in the past decade with an increase of
2.3 million tons per year over the past 10 years, largely attributed to the economic
boom of China and India during the period. Due to its higher yield, it is thus the
preferred source of vegetable oil for economical purpose.
In 2012, palm oil is estimated to make up about 32.8% of the worlds vegetable oil
consumption. The percentage is expected to reach a whopping 38% by 2020 as its
long-term demand continues to rise, supported by growing population and
increasingly developed economies in Asia over the next 10 years.
Competitive Positioning
Having three key business divisions, QL has attained its leadership position in two
of the core businesses. The entrenched position is unlikely to be shaken in our view.
The key factors include:

Stringent hygienic, quality and cost control for the poultry division
QL is at the top of the league in the poultry industry. It currently commands
approximately 13% market share of the industry. The fragmented nature of the
poultry industry has contributed to QLs competitive advantage over other industry
players. In contrast to other players which mainly have smaller operation scales,
QL differentiates itself with its modern facilities, located in bird-free enclosures
and equipped with high bio-security. Its focus on quality control in terms of
chickens health and production also ensures consistent demand from its customers.
The recent increase in the animal feed prices has hit other industry players hard.
Poultry farmers will have to resort to buying lower quality feed, subsequently
Fig 3: Broiler Meat per Capita
Consumption
Fig 5: Integrated Lifestock Farming
Five Forces Model
Fig 4: 2012 World Palm Oil Production
Source: indexmundi.com

4

Fig 7: Marine Product Manufacturing
Five Forces Model
Fig 8: Palm Oil Activities
Five Forces Model
RMm
Fig 6 Peer PBT
Source: Company data and teams estimate
leading to the fall in egg production and the incurring of a higher cost base.
Ultimately, we believe that it will lead to an erosion of their profitability. However,
being a significant supplier of animal feed itself, with a market share of
approximately 20%, QL has an edge over competitors in cost control.
This is proven when 3 out of the 4 largest egg producer in Malaysia suffered a loss
before tax (Fig 6) in the quarter ended 30 June 2012 due to rising prices of corn and
soybean meal. QL (2
nd
largest producer), however was able to defy the odds and
increase its segment profit before tax by 23.4% to RM21.1million for the same
period.
High barriers of entry throughout the supply chain for the surimi business
Surimi making process has a high barrier of entry due to its capital intensitivity, the
tedious processes involved as well as the requirement of technology know-how.
With its Japanese processing technology, QL is standing tall in its ability to gain
overseas customer confidence. It is now a regional player and exports to more than
15 countries including Japan, Singapore, South Korea etc. which are the key
consumption countries in Asia that demand the highest seafood quality in view of
their affluence and culture.

On the upstream, QL has also established strong partnerships with the local
fishermen. QL has been offering its financial assistance scheme to the fishermen
since 1987. The company has helped over 700 fishermen in rural villages to build
and modernise their boats and at the same time secure the long-term supply of
marine catch. The scheme, which is similar to microfinance, has provided more
than RM25 million of interest-free advances. Currently, 95% of QLs total fish
requirements are supplied by local fishermen, and the remaining 5% is sourced
from its own deep-sea fishing division with a fleet of 23 boats.

A growing integrated palm oil player
QL is an integrated palm oil plantation player. Besides the typical upstream
plantation value chain, QL has also successfully ventured into both mid-stream and
downstream activities which include palm milling, biogas, pelletisation, and
biomass boiler technology. No immediate plans are in place to engage in refinery
activities due to its currently thin margin. In view of the fluctuating nature of CPO
price, such integrated model should enable QL to withstand the volatile operating
environment better. In a declining price trend, QL does not have to sell its Fresh
Fruit Bunch (FFB) at depressed pricing as it can feed them into its own CPO mills.
QL has also gone into renewable energy for cost savings purpose. Its biogas plant
in Tawau currently produces about 1MW of electricity and powers the production
of palm pellet plant. Given that many palm oil plants in Malaysia, including QLs,
are located off the power grid, the biogas plant enables QL to self-generate the
power needed to operate the Palm Pellet plant. As for the palm pelletizing plant,
QL believes it is the first company in the world to have developed the
proprietary technology of converting Empty Fruit Bunch (EFB) into small-sized
palm pellets that can be used as feedstock to generate power. Transporting EFB in
its bulky state poses much difficulty and thus the new technology represents a
timely opportunity for QL and functions as an effective solution to alleviate the
impact of high Sabah logistic cost, which is currently estimated at RM 200 per
tonne.
Investment Summary

Fundamentals and valuations indicating a convincing BUY
We have derived a fair value of RM3.86 for QL, which represents an upside of 22%
from current level, using valuation methods of Discounted cash flow (DCF) and
Price earnings ratio (PER). QLs track record speaks for its strong fundamentals.
We like QL for three key reasons: (i) Entrenched position in resilient consumer
businesses; (ii) Strategic expansion plans underpin solid earnings growth over the
next three years; (iii) Undemanding current valuations as compared to the premium
valuations commanded by many large cap consumer companies with lower
earnings growth. In our view, the exciting growth prospects have yet to be priced in.

(i) Recession-proof food-based business segments underpin resilient earnings
The current market uncertainties are actually favourable for QL, given its defensive
qualities. QL is well diversified with its highly sustainable business model. The
company has never failed to deliver in terms of earnings in the past. We believe
0%
5%
10%
15%
20%
25%
FY11 FY12 FY13F FY14F FY15F
Sales Growth COS Growth PBT Growth
Fig 9 Growth trend

5

0
2000
4000
6000
8000
10000
12000
14000
16000
Cumulative Planting
Matured area
Fig 11: QL Indonesia Plantation
Progress
6.1%
4.5%
6.1%
6.5%
6.4%
7.2%
3%
4%
5%
6%
7%
8%
Fig 10: Indonesia Real GDP Growth
Source: Indonesia Government Official
Data and Forecast
Source: Company data and
teams estimates
Hectares
that this is a strong indication of the managements execution ability.
Both poultry and surimi divisions make up almost 90% of the companys earnings,
underpinning an uninterrupted earnings growth for 25 years. In the recent three
years, earnings grew steadily with a CAGR of about 11% since FY10. The
resilience in earnings is evident particularly in FY09. Despite the outbreak of the
avian influenza disease and sub-prime mortgage crisis, the company still recorded a
PBT growth of 14.7%. Going forward, we believe that the palm oil plantation
business will have a growing significance that should add to the resilience of core
earnings. The stock is, thus, appealing to investors seeking for low-beta exposure.
(ii) Exciting earnings Growth Prospects
QL is set to enter into a new phase of sustainable growth. We estimate a 3-year
earnings CAGR of 14.5% since FY12. FY15 will see the fruition of its current
expansion plans for all three industry segments.
The export market tapping the Asian consumption growth story
QLs increasing geographical exposure to Indonesia is highly strategic in our view.
QL has aggressively expanded its operations in Indonesia for years in all three
business segments and the management is likely to continue its focus in Indonesia
as the Malaysian market is relatively matured.
Export growth potential to Indonesia for poultry and marine products is massive.
Indonesia is the largest economy in Southeast Asia. Having a population base of
240 million, the country is endowed with rich natural resources. Economic growth
has been robust in the recent years (Fig 10), with GDP achieving 6.5% in 2011.
Regaining its investment grade rating from Fitch in late 2011 and from Moody in
early 2012, official data puts current year GDP growth at 6.4% for 2012, and is
poised for an increase to 7.2% in 2013. The growing middle class is the key engine
for consumption growth as per capita income rises. This should bode well for early
movers such as QL.
As for the surimi segment, having already exported to 15 countries, there is still a
significant upside in demand potential that is yet to be realised. This is largely
driven by both the economic and population growth within the Asia region. China
will be the key target market for surimi products. The rising popularity of
steamboat products in China will be a significant growth driver for surimi and
surimi-based product. To cater to the demand potential, QL is increasing its
capacity by expanding its surimi processing plant in Indonesia given the countrys
large sea area as well as untapped seafood resources.
Palm Oil Expansion
Earnings from the palm oil plantation segment will kick in more substantially in
FY15. The 16,200ha of palm oil plantation in Eastern Kalimantan, Indonesia is
expected to be fully planted by FY14 (Fig 11). The proportion of contribution from
the higher-margin upstream activities is set to expand as the maturity profile of the
trees increases, and hence driving the earnings. We expect a CAGR of 9.1% over
FY12-15F for palm oil plantation revenue. PBT margin should also expand from
9.8% in FY13F to 14.5% in FY15F, as plantation yields improve. The growth in
margin is also attributed to the reduction in the procurement of FFB from third
parties as it increases the reliance on its own FFB production.

6

2000
2200
2400
2600
2800
3000
3200
Source: Team Estimate
Source: Bloomberg
Fig 12: Event analysis
timeline

Valuation
We value QL based on a Discounted Cash Flow (DCF) methodology and
Price/Earnings Ratio (PER), which we think are most appropriate to capture the
potential upside from its regional expansion and maturing upstream palm oil
business, which will only start to contribute meaningfully from FY13F onwards.
Using the figures derived from these two methods, we arrive at our target price of
RM3.86/share, which implies upside of 22% over current levels.
Discounted Cash Flow Model: Free Cash Flow to Equity (FCFE)
We use a two stage FCFE model which takes into consideration time value of
money. Since QL has high growth prospects, FCFE would measure its value in a
longer term perspective, reflecting the free cash flow value of the company while
taking into account for strong future growth.
Three-year Projected Cash Flow Assumptions
EPS is forecasted to grow at CAGR 15.1% from FY13F-FY15F as a result of
increasing sales, improving margins as well as low working capital requirement.
Strong Sales with improving margins
From our projections, we estimate that QLs revenue should grow at a CAGR of
10.9% over FY13-15F. This revenue growth will be mainly driven by the increase
in production capacity for its ILF and MPM division as well as the contributions
from maturing upstream POA. Such growth rate is considered exceptional for a
company of its size and its FY15F revenue of RM 2.7 billion is expected to be
more than double its FY 08 revenue of RM 1.3 billion.
Due to its gradual shift to higher margin business, coupled with the higher yield of
upstream oil palm plantation, QLs gross profit margin would improve from 15.5%
in FY12 to 16.3% in FY15F. Professional cost management through its
involvement in animal feed supply also helps QL to keep its cost base under check.
CAPEX
QL Resources has committed RM200 million to fund the capex requirement for
both FY13F and FY14F. We project that QLs capex will be reduced to RM100
million in FY15F where it will consolidate its operations after years of aggressive
expansion. QL has expressed its intention to source 60% of this amount externally
via borrowings while the remaining 40% will be funded internally.
CPO price outlook
The CPO price recently slumped to a three-year low at below RM2,200 per tonne
(Fig 13) due to rising stockpiles and the slowing down of global economic growth,
effectively causing demand to spiral downwards. However, it is noteworthy that
0
0.5
1
1.5
2
2.5
3
3.5
4
April 06 April 07 April 08 April 09 April 10 April 11 April 12
RM
28 July 09, QL exceeds 1
bn market capitalisation
July 10, QL was recognised
by The Edge as a member of
the Billion Ringgit Club
July 11, QL won the
prestigious The Edge
Billion Ringgit Club
FCFE Components
Estimate Long-Term
Growth Rate
1.80%
Equity Value
(RMm)
3,314.2
No. of shares in
million
832
Share price
(RM/share)
3.98
Fig 13: CPO Recent 6 months Future Price
Source: Bloomberg
RM
21
st
Dec 09, QL was
included as one of the
component stocks of the
FTSE- Bursa Malaysia
Mid 70 Index
May 06, Ranked 2
nd
in top 100
best returns listed companies by
the Edge Magazine
QL FY 06 revenue
exceeds 1 bil
Source: Bloomberg and company website

7

0
0.5
1
1.5
2
2.5
3
3.5
4
1
0
1
1
1
2
PE 23x
PE 19x
Source: Team Estimate
Source: Bloomberg
0
50
100
150
200
250
11 12 10
palm oil output typically peaks around July to October, and with the revision of
export tax starting from 1 January 2013, the stockpile problem shall ease. We
believe the current situation is oversold as the price differential between palm oil
and soybean oil is near four-year high. The arbitrage opportunity between selling
spot on MDEX and the physical spot market also appears to contribute in the sell-
down of CPO.
With the export tax revision, proposal of expanding its usage as biodiesel as well as
talks of a possible supply mechanism between Indonesia and Malaysia, we believe
the CPO price, while may not experience an immediate significant rebound, shall
remain intact in the intermediate term. Therefore, we assign values of RM2,800,
RM3,000 and RM3,100 for QLs FY13-15.
Cost of equity
The cost of equity is derived using the CAPM model. A risk free rate of 3.5% is
determined from the yield on short term Malaysian Government Securities while
the expected market return of 7.74% is the result of compounded annual growth
rate of FBM KLCI Composite Index (previously known as KLSE) for the past 10
years. Together with the company beta of 0.8 extracted from Bloomberg, a cost of
equity of 6.89% is arrived.
Price/Earnings Ratio (PER)
We obtain a fair value of RM3.73/share using a P/E of 18x. For the past 12 months,
QLs P/E has fallen within the range of 16x to 20x (Fig 14). We have thus arrived
at the average of 18x to calculate the estimated share price, which is seemingly
reasonable given that QL is currently trading at a P/E of more than 19x. Based on
the estimated EPS growth of 15.7% from FY12-FY15F, a Price/Earnings Growth
Rate (PEG) of 1.15x is derived, which is in line with the regional average, further
justifying the suitability of the P/E used.
Financial Analysis

Earnings:
We estimate an EPS of 18.4sen and 20.7sen for FY13F and 14F, representing an
EPS growth of 16.5% and 12.5% respectively. The growth is mainly driven by the
increase in production capacity for both its ILF and MPM division as well as the
contributions from the maturing upstream POA. Income from the egg production
and palm oil will increase, resulting in lower revenue contribution generated from
lower-margin activities such as animal feed trading. The 1Q FY13 revenue
accounted for 23.2% of our projected FY13 total revenue. This is consistent with
the companys seasonality factor of 0.21 for 1Q and the preceding years 1Q
revenue which accounted for 23.4% of total revenue for FY12.
Gross Profit Margin
Based on our forecast, gross profit margin is expected to trend up from 15.5% in
FY12 to 16.3% in FY15F, due to the gradual shift to higher-margin businesses. For
the poultry division, focus will be concentrated on egg broilers and DOC which
traditionally have a better yield. In comparison to the largest egg producer in
Malaysia, Huat Lai Resources Bhd, QL has been able to achieve a higher PBT
margin (8.23%) than the former (6.14%) due to professional cost management. We
believe QL, being a supplier of animal feeds itself, enjoys a relatively lower cost
base and has the ability to pass on any cost hikes to its customers.
Furthermore, in view of the recent slew of measures introduced by Malaysian and
Indonesian government, we expect palm oil prices to stabilise over the intermediate
term. QLs margin in the palm oil segment is, therefore, expected to increase as its
upstream plantation matures, driving margin expansion.

Margins well controlled via efficient cost management and strategic
investments
While there may be concerns among investors that the recent Midwest drought in
the US would push up feed cost for animals as corn and soybean prices soar,
impact on QL is mitigated given its engagement in feed raw material trading
business. This natural hedge would help to partially offset the higher cost arising
from the import of the raw materials from the US. Historically, QL has also been
able to pass on the cost increase to the customers, allowing the trading margins to
be kept intact.
Cost of Equity Components
Risk-Free Rate 3.50%
Expected Market
Return
7.74%
Equity Risk Premium 4.24%
Beta 0.80
Cost of Equity 6.89%
Weight Price W x P
FCFE 50% 3.98 1.99
PER 50% 3.73 1.87
Target Price (RM/share) 3.86
Fig 14 P/E Band
RM
PE 15x
PE 11x
PE 7x
Fig 15: Earnings growth
RMm

8

Egg
20%
DOC
3%
Broiler
2%
Animal
Feed
33%
Deep Sea
Fishing
1%
Surimi
23%
Palm Oil
18%
Egg
26%
DOC
4%
Broiler
2%
Animal
Feed
27%
Deep
Sea
Fishing
0%
Surimi
24%
Palm
Oil
17%
Fig 16: Revenue breakdown by
Segment FY12
Fig 17: Revenue Breakdown by
Segment FY 15
Fig 18: Operating Cash Flow and Net
Debt to Equity
Source: Teams Estimates
RMm
QL currently owns a 40.51% stake in Boilermech Holdings Bhd. Given
Boilermechs expertise in agricultural biomass power and heat generation, QL
could leverage on the technology to extract higher output yield, and therefore
generate better profit margins.
QLs 24.17% equity stake in Lay Hong also offers a synergistic benefit. Given that
Lay Hong is also in the poultry business, QL has turned a competitor into a
strategic partner. Both companies will be able to collaborate in various areas to
improve operation efficiency and supply chain networks. Moving forward, the
management of QL has not ruled out the possibility of acquiring other suitable
industry players if such opportunities were to arise. We believe any acquisition
(provided at the right price), will help QL to further strengthen its market position
in the poultry business by reducing market rivalry.
Cash flow:
Healthy operating cash flow
Given QLs steady food business, the companys cash flow generation profile has
been rather steady, delivering positive operating cash flow every year since FY00.
The low working capital requirement has also contributed to the strong cash flow
position. Despite some slight fluctuations in certain years, its cash flow has grown
by a healthy 9.5% CAGR from 2008-2012, which allows the company to fund its
continuing CAPEX commitment. Thus far, QL has also never encountered any
issues in raising finance and we do not foresee any changes to this.
Stable cash cycle and dividend policy
We expect that QLs cash cycle should remain between 44 and 50 days over
FY13F-FY15F. The management has also committed itself to a 25-30% dividend
payout policy, which is in line with its historical payout. With the anticipated
increase in operating cash flow and the absence of any difficulties in the raising of
funds, we forecast a DPS of 27.81sen and 28.88sen for FY13 and 14, representing
a dividend payout rate of 27.8%. Retained earnings will be better utilised for future
expansion.

Balance sheet and financing:

Manageable gearing level despite aggressive expansion plans
In our view, QLs net gearing will peak at 58% in FY13, which we think is still
manageable and also within the companys comfortable zone. This can be
confirmed by its strong Altman Z-Score (Appendix 7). The higher gearing is
mainly attributed to the aggressive expansion plans put in place by the management
in scaling up its operations, especially in Indonesia.
The RM200m investments set aside for FY13 and FY14 include ramping up the
egg and day-old-chicks production, as well as expanding the production capacity in
the marine operations in Indonesia. As a result, the capacity is estimated to increase
by 10,000mt each year from FY13-FY15, representing a growth of 31.6% from its
existing capacity. More funds will also be allocated to the palm oil activities in
Kalimantan, Indonesia for the planting exercise which shall be completed by FY14.
Over a longer term, we believe that QL will continue with its regional expansion in
Indonesia and Vietnam where the growing population in these emerging markets
represents a new growth area especially for food consumption. QL has rightly
positioned its foothold in the region.
With a fairly healthy interest cover of between 9 times to 10 times, QLs
fundamentals are strong enough to generate enough cash flow to finance its interest
expense. Supported by strong financial performance, its interest cover should
further improve to 11.7 times by FY15 despite some increase in borrowings.
Beyond FY14, QLs gearing is expected to normalise as CAPEX commitment
declines. Cash flow from main businesses will pick up and therefore debt will be
pared down over the next 2-3 years (Fig 18).

Figure: Increase/Decrease in C& CE Figure: Increase/Decrease in C& CE

9

Additional positive factors
Budget 2013
From the recent budget announcement, the consumer sector as a whole is
expected to benefit from the estimated RM 7-8 billion distribution to the general
public in forms of aids and incentives. The cash handouts, bonuses for civil
servants and reduction in taxes should increase the public disposal income and
continues to underpin consumer demand and spending. While not a direct
beneficiary of any specific measures, we view the budget is in overall favourable
for QLs short to medium term development.
Halal food products
Most of QLs food products (poultry, broilers, surimi etc.) have obtained the
halal certification and with this, there is great growth potential from the
sizeable and growing Muslim population in the global halal market (Appendix 8).
The Muslim population is expected to reach 1.9bn by 2020 while the Halal
Industry Development Corporation estimate current global halal market at more
than US$800 billion (RM2.42 trillion). QLs main market of Southeast Asia is
home to about 250 million Muslim consumers and with the right leverage, it may
discover more untapped potential in its food products.
The management and governance structure
While most family businesses are often associated with the practice of nepotism,
QL appears to have a strong governance structure in place to deal with these
inherent issues effectively, thus leading to its success today. Voted one of the
Highest Profit Growth Company by the EDGE in 2011 and with an average
Return On Equity (ROE) of 28.2% for the last 5 years, it appears that shareholders
wealth has been maximized and this can be replicated in the future. The award of
The Edge Billion Ringgit Club Company of the Year in 2011 is a further testimony
and recognition of QLs strong management and governance structure.
Investment Risk
Weaker Oil Palm Prices
The fluctuations in Crude Palm Oil (CPO) prices will have an impact on QLs
earnings given its exposure to the segment. However, it should be noted that the
impact will be limited as the segment currently makes up only a small proportion
of QLs business activities, and is only expected to contribute 9.73% to its
consolidated PBT of FY13.
CPO prices have weakened in the recent months. The rising stockpiles and
lacklustre demand growth amidst slowing global economy are likely to exert
downward pressure on CPO prices over the short term. Since hitting its 3-year low
of RM2,200 per tonne, the CPO prices have since rebounded to a level of
RM2,500-2,600 per tonne. With the downward revision of export tax starting from
1 January 2013 and talks of possible supply mechanism collaboration between
Malaysia and Indonesia, the long-term fundamentals and outlook for CPO remain
intact in our view. Underlying demand will continue to be underpinned by
population and economic growth in the region.
Outbreak of Avian Influenza Virus
Given QLs poultry business represent more than 50% of its business activities, we
think any outbreak of influenza virus will pose the biggest risk. Outbreak of
diseases could result in a 45-60% drop in the demand for day old chicks and feed
inputs as seen in Indonesia in 2004, as reported by CASERED. According to WHO,
the total number of human influenza A(H5N1) cases in Indonesia to date is 191
with 159 fatalities, 8 of which occurred in 2012. However, QLs modern facilities,
located in bird-free enclosures with high bio-security, and focus on quality control
in terms of chickens health and production, should be able to help to control any
spread of diseases.

Fluctuating Weather and Climate
We do not discount the possibility that fishing grounds in Malaysia may decline in
FY13-15 due to unforeseen circumstances and adverse changes in the weather
conditions such as the La Nina and El Nino phenomenon. With the marine segment
being the second largest segment in QL resources, this may have an impact to a
certain extent on the companys financial figures as both warm and cold waters
may drive fishes away, leading to a lower fish capture. However, past studies
Sensitivity to a 10%
decline in CPO Price
% Change
FY13F EPS (2.55%)
FY14F EPS (1.94%)
FY15F EPS (2.54%)
Target Share Price (0.52%)
Source: Team Estimates

10

have indicated that countries in the west pacific such as Malaysia, Thailand and
Indonesia were relatively unaffected by the last El Nino in 1998. The recent
climate indicators have also signalled low possibilities of adverse La Nina or El
Nino conditions. (Appendix 13) Therefore, we think that the probability of this
risk arising is considerably remote.

Limited impact from cut in diesel subsidy
The changes in diesel price are unlikely to disrupt QLs cost management. As part
of the ongoing subsidy reform in Malaysia, diesel subsidies were cut with effect
from 2011 to RM1.80/litre. This would result in an increase in procurement cost.
However, we note that the subsidy cuts only affect C2 deep-sea fishing trawlers,
where the impact will be limited to QLs deep-sea fishing operations, as the
segment only accounts for merely 1-2% of total revenue. The surimi fishing
operations, where the fishes are of lower value and can be caught closer to shore,
would remain unaffected. Given also the industry supply constraints, any price hike
can be passed on easily to the consumers.
Regulatory and economical risk in Indonesia
Nationalist policies and inconsistent regulations have recently spook investors in
the banking and mining industry. The cut of benchmark rates by 100 basis points in
late 2011 and early 2012 by the Indonesia central bank was also seen as an
overreaction to the economic environment and has spark inflationary pressure in
early months of 2012. However, we note that QLs operations in Indonesia are
largely food products and are not heavily regulated. The benchmark rate has also
been held at 5.75% for eight consecutive months. We draw comfort from the recent
policy statement by Bank Indonesia Governor Darmin Nasution to keep the policy
rate consistent with low and manageable inflationary pressure. We believe that a
rate cut is unlikely until 2014 as the economy is growing well thus the economic
environment for QL in Indonesia should be kept stable.

Foreign Exchange Risk
QL mainly imports its animal feed for the livestock division from the US market
and exports its marine products to Japan. The main exposure to foreign currency
risk for QL is, therefore, the US dollar whereas exposure to other currencies is
relatively insignificant. In our view, outlook for the US dollar is still mixed,
considering that the Federal Reserve System could hold its low interest rate until
mid 2015 while the US economy has somewhat recovered but still lacks the
necessary momentum. In any case, we believe that the exposure should not have a
material effect on QLs performance. As noted in the Annual Report, a 1.5%
weakening in USD against RM would increase QLs profit by RM51,000 and
equity by RM118,000. An equal but opposite effect would occur if RM weakens
against USD.
Valuation risk
Our FCFE derived target price assumes a 6.89% cost of equity and 1.8% terminal
growth rate. A sensitivity analysis of the target price to these two variables
suggests a valuation range of RM3.54-4.53, which in any case shall still represent a
significant upside from the current level. With the additional assurance from the
PER method, we note that the sensitivity is nominal and thus the final valuation
derived is fair.
Target price (RM)
Cost of equity
6.3% 6.6% 6.89% 7.2% 7.5%
Terminal
Growth
Rate
1.4% 4.18 3.93 3.71 3.5
3.32
1.6% 4.35 4.08 3.84 3.62 3.42
1.8% 4.53 4.24 3.98 3.75 3.54
2% 4.74 4.41 4.14 3.88 3.66
2.2% 4.96 4.61 4.31 4.03 3.32

Sensitivity to a 10%
decline in Marine
Production Volume
% Change
FY13F EPS (2.99%)
FY14F EPS (2.30%)
FY15F EPS (3.59%)
Target Share Price (0.78%)

11

Disclosures:
Ownership and material conflicts of interest:
The author(s), or a member of their household, of this report does not hold a financial interest in the securities of this company.
The author(s), or a member of their household, of this report does not know of the existence of any conflicts of interest that might bias the content or
publication of this report.
Receipt of compensation:
Compensation of the author(s) of this report is not based on investment banking revenue.
Position as a officer or director:
The author(s), or a member of their household, does [not] serves as an officer, director or advisory board member of the subject company.
Market making:
The author(s) does [not] act as a market maker in the subject companys securities.
Disclaimer:
The information set forth herein has been obtained or derived from sources generally available to the public and believed by the author(s) to be reliable,
but the author(s) does not make any representation or warranty, express or implied, as to its accuracy or completeness. The information is not intended to
be used as the basis of any investment decisions by any person or entity. This information does not constitute investment advice, nor is it an offer or a
solicitation of an offer to buy or sell any security. This report should not be considered to be a recommendation by any individual affiliated with CFA
Malaysia, CFA Institute or the CFA Institute Research Challenge with regard to this companys stock.


12

Appendix

Appendix 1: Income Statement

FYE March FY10 FY11 FY12 FY13F FY14F FY15F

RM'm RM'm RM'm RM'm RM'm RM'm
Revenue

1,476.4

1,777.1

1,946.7

2,130.7

2,319.4

2,654.0
Growth

20.4% 9.5% 9.5% 8.9% 14.4%
Cost of sales

(1,233.0)

(1,489.6)

(1,645.2)

(1,788.7)

(1,943.6)

(2,219.3)
Gross Profit

243.4

287.7

301.6

341.6

375.5

433.7
-Gross Profit Margin 16.5% 16.2% 15.5% 16.03% 16.19% 16.34%

Administrative expenses

(71.7)

(83.9)

(105.9)

(106.7)

(116.1)

(132.9)
Distribution cost

(23.4)

(25.7)

(28.0)

(31.8)

(34.6)

(39.6)
Other expenses

(11.5)

(12.5)

(13.4)

(15.4)

(16.7)

(19.1)
Other income

11.7

9.3

30.7

25.6

27.8

31.8
EBIT

148.5

174.8

184.9

213.3

235.9

274.0
-EBIT Margin 10.1% 9.8% 9.5% 10.0% 10.2% 10.3%

Finance Cost

(13.7)

(18.4)

(22.6)

(25.1)

(26.2)

(27.3)
Finance Income

0.8

1.1

1.7

2.3

2.5

2.7
Share of Profits of Equity
Accounted

0.5

3.5

8.4

11.4

13.1

15.2
Profit Before tax

136.0

161.0

172.4

201.9

225.4

264.6
- PBT margin 9.2% 9.1% 8.9% 9.5% 9.7% 10.0%

Income Tax Expense

(20.9)

(27.0)

(33.1)

(39.4)

(43.9)

(51.6)
Effective tax rate 15.4% 16.8% 19.2% 19.5% 19.5% 19.5%
Profit for the Year

115.2

134.1

139.4

162.6

181.5

213.1
Non-Controlling Interest

8.2

9.2

7.8

8.3

9.0

9.6
Profit Attributable to:

Owners of Parent

106.9

124.6

131.4

154.3

172.6

203.5
Growth

16.5% 5.5% 17.4% 11.9% 17.9%
Net margin 7.2% 7.0% 6.8% 7.2% 7.4% 7.7%

Share capital

197,586

208,000

208,000

208,000

208,000

208,000
Total no. of shares 790.3 832.0 832.0 832.0 832.0 832.0
EPS (cents)

13.5

15.0

15.8

18.5

20.7

24.5

13

Appendix 2: Balance sheet


14

Appendix 3: Cash Flow Statement

FY10 FY11 FY12 FY13F FY14F FY15F
Cash flows from operating activities RM'm RM'm RM'm RM'm RM'm RM'm
Profit before tax 136 161 172 202 226 267

Depreciation/Amortisation 39 47 56 75 84 93
Non-cash items 16 14 (6) (16) (38) (56)
Operating profit before changes in
working capital 191 221 222 261 272 304
Changes in working capital (21) (64) (26) (72) (36) (47)
Cash generated from operations 171 158 196 189 236 257
Dividends from liquid investment - 0 0 0 0 0
Tax paid (14) (23) (23) (31) (35) (40)
Interest paid and received (3) (4) (6) (5) (5) (4)
Net cash generated from operating
activities 154 131 168 153 197 213

Cash flows from investing activities

Capital Expenditure (119) (245) (261) (200) (200) (100)
Proceeds from disposal 7 3 18 13 14 14
Dividends received 1 1 2 3 3 4
Other investments - (12) (3) (3) (3) (3)
Net cash generated from investing
activities (111) (252) (244) (188) (187) (86)

Cash flows from financing activities

Proceeds 32 182 101 120 120 60
Repayment of loan (11) (15) (16) (21) (24) (25)
Dividends paid (25) (32) (39) (48) (54) (65)
Other financing items 3 1 1 2 3 4
Net cash generated from financing
activities (2) 136 47 53 44 (26)

Net increase/(decrease) in cash & cash
equivalent 41 15 (29) 18 54 101
Cash & cash equivalent at beginning of
year 61 102 117 88 106 160
Cash & cash equivalent at end of year 102 117 88 106 160 262


15

Appendix 4: Key Financial Ratios

Margins

Gross Profit Margin

16.49% 16.18% 15.49% 16.05% 16.20% 16.38%
PAT Margin

7.79% 7.53% 7.15% 7.58% 7.80% 8.10%
EBITDA Margin

12.74% 12.67% 12.79% 14.06% 14.37% 14.43%

Growth

Sales Growth

5.61% 27.12% 39.26% 52.42% 65.92% 89.85%
COS Growth

2.96% 20.81% 10.45% 8.72% 8.66% 14.18%
PBT Growth

23.77% 18.23% 7.14% 17.40% 11.90% 18.06%
Net Profit Growth

19.04% 16.27% 4.01% 16.11% 11.90% 18.92%

Investors Ratios

Dividend per Share (RM) 0.03 0.04 0.04 0.05 0.06 0.07
Earnings per Share (RM) 0.14 0.15 0.16 0.18 0.21 0.25
Net Asset per Share (RM) 0.71 0.96 1.06 1.22 1.38 1.57
Dividend Yield (%)

1.68% 1.14% 1.31% 1.51% 1.46% 1.51%
Earnings Yield (%)

7.84% 4.83% 4.86% 5.41% 5.20% 5.41%

Activity (days)

Receivables

41.36 41.95 40.31 41.21 41.21 41.21
Payables

27.00 30.99 30.35 29.44 29.44 29.44
Inventory

38.92 41.66 33.99 38.19 38.19 38.19

Liquidity Ratio (times)

Current Ratio

1.55 1.47 1.29 1.42 1.43 1.71
Quick Ratio

0.52 0.53 0.44 0.50 0.58 0.78

Profitablity Ratio

Return on Equity

20.60% 16.74% 15.81% 15.91% 15.76% 16.49%
Return on Assets

10.40% 9.09% 8.33% 8.39% 8.30% 8.94%
Return on Capital Employed 18.31% 16.60% 15.60% 15.42% 15.29% 15.83%


16

Appendix 5: Peer Comparison

Appendix 6: DuPont Analysis
Profit Margin (%) 7.79% 7.53% 7.15% 7.58% 7.80% 8.10%
Asset Turnover (times) 1.3348 1.2070 1.1652 1.1065 1.0652 1.1034
Equity Multiplier
(times)
1.9802 1.8420 1.8984 1.8963 1.8978 1.8443
ROE (%) 20.60% 16.74% 15.81% 15.91% 15.76% 16.49%

Appendix 7: Altman Z-Score Analysis
Weight FY10 FY11 FY12 FY13F FY14F FY15F
Working capital/Total Assets 1.2 0.144 0.123 0.076 0.102 0.107 0.170
Retained earnings/Total Assets 1.4 0.286 0.280 0.304 0.321 0.341 0.370
EBIT/Total Assets 3.3 0.135 0.121 0.116 0.117 0.115 0.121
Market Value of Equity/Total Liabilities 0.6 2.490 3.832 3.421 3.115 3.207 3.450
Sales/Total Assets 1.0 1.335 1.207 1.165 1.107 1.065 1.103
Z-Score 3.8 4.4 4.1 3.9 4.0 4.3

Altman Z-Score Interpretation Scale:
Z-Score Interpretation
> 3.0 Company is considered Safe based on financial figures
2.7-2.99 This zone is an area where one should Exercise Caution
1.8-2.7 Good chance of the company going bankrupt within 2 years of operations from the date
of financial figures given
< 1.8 Probability of financial catastrophe is very high

Companies
Market
Cap (RM)
Share
Price
PE
FY12 (x)
PE
FY13(x)
EPS
FY12
EPS
FY13
FY13 EPS
growth
ROE (%)
FY12
DY (%)
FY13
BAT 18,359.58 64.30 23.2 22.6 2.79 2.86 2.7% 173.3 4.22%
JIT 1,780.00 6.80 14.2 13.8 0.48 0.49 2.9% 30.5 4.51%
Carlsberg 3,992.69 12.96 21.6 19.6 0.60 0.66 10.2% 28.6 4.98%
Guinness 4,996.70 16.54 22.3 21.0 0.74 0.79 6.3% 59.0 4.53%
AEON 4,506.84 12.84 21.7 19.8 0.60 0.66 9.9% 14.7 1.24%
Parkson 5,228.85 4.78 12.3 10.3 0.39 0.47 19.8% 16.1 3.67%
NESTLE 16,339.96 69.68 32.7 30.6 2.13 2.28 6.7% 75.4 3.38%
F&N 7,186.09 19.78 37.5 26.0 0.53 0.76 44.4% 14.4 3.77%
Dutch Lady 3,200.00 50.00 28.3 26.8 1.77 1.87 5.6% 43.1 2.62%
QL Resources 2,604.17 3.17 20.2 18.0 0.18 0.21 16.7% 15.8 1.51%
Source: Grahaminvestor.com
Source: Bloomberg and teams estimates


17

Appendix 8: Worldwide Distribution of Muslim Population


18

Appendix 9: QLs Operating Bases

City Country
HQ
Kuala Lumpur Peninsular Malaysia
Integrated Livestock Farming
Kulim Peninsular Malaysia
Nilai Peninsular Malaysia
Rawang Peninsular Malaysia
Kuching East Malaysia
Kota Kinabalu East Malaysia
Tawau East Malaysia
Cianjur Indonesia
Tay Ninh Province Vietnam
Marine Product Manufacturing
Hutan Melintang Peninsular Malaysia
Endau Peninsular Malaysia
Johor Bahru Peninsular Malaysia
Tuaran East Malaysia
Surabaya Indonesia
Palm Oil Activities
Tawau East Malaysia
East Kalimantan Indonesia

19

Appendix 10: QLs Group Structure

20

Appendix 11: Surimi

What is surimi?
Surimi is a fish-based food product that has been pulverized to a thick paste that has the property of a
dense and rubbery food item when cooked. It is typically made from white-fleshed fish (such as
Pollock or hake). Surimi is a common food product in many Asian cultures and is often used to
mimic the texture and colour of the meat of lobster, crab and other shellfish. The most common
surimi product in the Western market is imitation crab and mock crab in America, and as seafood
sticks, crab sticks, fish sticks or seafood extender in Commonwealth nations.

Fig 7: Imitation crab meat Fig 6: Imitation shrimp
Source: Wikipedia

21

Appendix 12: Surimi making process

Fish landing at jetty White meat fish
Dehead and gutting
Deheading Automatic deboning
Leaching and refining
Mixing and forming
Quick freezing
X-ray detection
Export
Storage in cold room
Packing

22

Appendix 13: Weather conditions

Figure 8: Probability of Southern Oscillation Event

Sustained values of the SOI above +8 may indicate a La Nia event, while sustained negative
values below 8 may indicate an El Nio event. Values of between about +8 and 8 generally
indicate neutral conditions.
Source: International Research Institute for Climate and Society
Note: Rolling 3-month probability, SON 2012 = September/October/November 2012
Southern Oscillation Index
Source: Australia Bureau of Meteorology

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