BIMB Securities Research starts coverage on QL with Neutral call, target price RM3.43

KUALA LUMPUR (APRIL 6): BIMB Securities Research has initiated coverage on QL Resources at RM3.21 with a Neutral recommendation and target price of RM3.43.

The research house in a note Friday said that despite a prospective global economic slowdown, QL’s revenue growth would remain intact.

In addition, the demand for its basic food products such as eggs, fishmeal and feed raw materials are expected to be resilient, it said.

“Due to the recent share price run-up, we have a Neutral rating on QL with a target price of RM3.43 based on PER of 19x CY2012 EPS. The PER multiple is +1 std. dev of its past 3-years PE valuation which is justified by its solid fundamental and long-term earnings growth potential.

QL’s core activities includes marine products manufacturing (MPM), palm oil activities (POA) and Integrated Livestock Farming Activities (ILF).

“As of FYE03/11, ILF has been the biggest contributor to the group’s total revenue (56%), followed by MPM (25%) and POA (19%). We are initiating coverage on QL Resources with a Neutral rating on the stock with an indicative target price of RM3.43 based on 19 times CY2012,” said BIMB Securities Research.



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RHB Research sees consumer spending growth remaining resilient

KUALA LUMPUR (March 14): RHB Research Institute forecasts consumer spending growth would remain resilient at 5.8% for 2012, albeit at a slower pace as compared to 2011.

It said on Wednesday that in 2011, domestic consumer spending grew by 6.9% on-year, the fastest in three years and stronger than the 6.5% on-year growth in 2010.

“We believe the rate of growth of consumer spending would slow in 2012 (vs. 2011) as the high levels of household debt has prompted Bank Negara (BNM) to further tighten its grip on consumer lending by imposing more stringent measures on consumer credit and this could have an impact on consumer spending,” it said.

Nevertheless, despite the credit tightening, RHB Research believes consumer spending would still remain relatively resilient for FY12, underpinned by the high savings rate, rising consumerism and favourable labour market conditions.

Furthermore, it believes that the impact of the tighter credit would mainly affect big ticket items such as property and vehicle sales and to a certain extent, electrical goods, as the banks now have more stringent criterion for approving housing loans and hire purchase loans.

“Underpinned by the resilient consumer spending outlook and despite the external headwinds, we remain positive on the topline growth outlook of the consumer sector (for all retail, F&B and sin stocks),” it said.

RHB Research reiterated its Overweight stance on the sector. Its top picks are QL Resources for the F&B segment and Parkson for the retail segment.



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CIMB Research has technical buy on QL Resources at RM3.28

KUALA LUMPUR (March 2): CIMB Equities Research has a technical buy on QL Resources at RM3.28 at which it is trading at a price-to-book value of 2.0 times.

It said on Friday that QL Resources has been consolidating in a triangle pattern for the past few weeks.

“We think that the stock is ripe for a stronger rebound. If the candles can push above the RM3.33 level, there is a good chance that prices may re-rate towards RM3.40, RM3.50 and RM3.70,” it said.

CIMB Research said that the MACD signal line is flattening while RSI is gyrating near the 50pts mark.

“We think these are just reflections of its earlier consolidation,” it said.

The research house said traders may join the buying bandwagon once the candles push above the RM3.33 level. Always put a stop at RM3.23 to limit downside risk.



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Stocks to watch: AFG, Maybank, Tradewinds Plant, KrisAssets

KUALA LUMPUR (Feb 22): With the corporate results season for the October-December in full swing until Feb 29, they will provide the leads for investors.

So far the banks and PLANTATION []s have been reporting firm set of earnings, based on the recent results, though there had been some writebacks.

Among the stocks to watch are ALLIANCE FINANCIAL GROUP BHD [] (AFG), MALAYAN BANKING BHD [], Tradewinds Plantations Bhd and TH PLANTATIONS BHD [].

Also in focus could be QL RESOURCES BHD [], KRISASSETS HOLDINGS BHD [], Malaysia Marine and Heavy Engineering Holdings Bhd (MMHE), Malaysia Airports Holdings Bhd (MAHB), TEBRAU TEGUH BHD [] and ENG TEKNOLOGI HOLDINGS BHD [].

AFG posted net profit of RM121.29 million in the third quarter ended Dec 31, 2011, up 9% from the RM111.26 million, underpinned by growth in interest income due to the expansion in loans.

Its revenue increased by 9.2% to RM311.43 million from RM284.98 million. Earnings per share were 7.90 sen compared with 7.30 sen.

AFG said for the nine months ended Dec 31, 2011, the earnings rose 14.6% to RM371.80 million from RM324.27 million while it recorded a 9% increase in revenue of RM935.80 million from RM858.18 million.

Maybank has proposed to establish a subordinated programme of up to RM7 billion in nominal value. The net proceeds from the issuance of the subordinated notes will be utilised to fund Maybank’s working capital, general banking and other corporate purposes.

Tradewinds Plantations’ earnings increased 17.5% to RM97.75 million in the fourth quarter ended Dec 31, 2011 from RM83.33 million a year ago, boosted by an increase in its palm products production.

Its revenue soared 174% to RM804.23 million from RM293.45 million.

For the year ended Dec 31, 2011, its net profit increased 79.9% to RM335.46 million from RM186.40 million. Revenue rose 86.8% to RM1.70 billion from RM909.13 million.

TH Plantations recorded a 11.3% fall in profits to RM37.71 million in the fourth quarter ended Dec 31, 2011 from RM42.52 million a year ago, due to maintenance carried out during the quarter.

Its revenue increased by 1.99% to RM130.09 million from RM128.53 million. It proposed dividend per share of 12.50 sen.

For the year ended Dec 31, 2011, net profit increased 39.5% to RM124.83 million from RM89.48 million. Revenue rose 18.8% to RM434.86 million to RM365.97 million.

QL Resources' net profit increased by 3.8% to RM34.42 million in the fourth quarter ended Dec 31, 2011 from RM33.14 million a year ago, due to increased sales in its marine product manufacturing arm, palm oil activities and livestock farming. Its revenue increased 10.6% to RM498.96 million from RM450.95 million a year ago.

KrisAssets said the market value of its two malls -- Mid Valley Megamall and The Gardens Mall in Kuala Lumpur – have been revalued at RM3.290 billion as at Dec 31, 2011. It said this was RM470 million above the valuation as at Sept 30 of RM2.82 billion.

MMHE’s earnings fell 65.4% to RM46.35 million in the third quarter ended Dec 31, 2011 from RM134.15 million a year ago. Its revenue declined 45.6% to RM716.15 million from RM1.316 billion a year ago.

For the nine months, its earnings fell 36.1% to RM205.60 million from RM322.11 million in the previous corresponding period. Its revenue declined 39.1% to RM2.137 billion from RM3.512 billion.

MAHB’s earnings were just up 0.8% to RM122.88 million in the fourth quarter ended Dec 31, 2011 from RM121.91 million a year ago. Its revenue increased by 2% to RM837.38 million from RM820.60 million.

For the financial year ended Dec 31, 2011, its earnings rose 26.6% to RM401.11 million from RM316.78 million. Its revenue increased 11.6% to RM2.754 billion from RM2.468 billion.

Tebrau Teguh reported net losses of RM1.13 million for the fourth quarter ended Dec 31, 2011 due to higher operating expenses. It was also in the red with net loss of RM212,000 a year ago.

For FY11, it was still profitable, with net profit of RM2.58 million, down by 29% from RM3.63 million in FY10. Revenue fell 37.3% to RM113.41 million from RM180.97 million.

Eng Teknologi was in the red for the fourth quarter ended Dec 31, 2011 and for the financial year with net losses of RM51.81 million, and RM42.90 million. The manufacturer of components for hard disk drives said it wasimpacted by the severe floods in Thailand last year.



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QL Resources 3Q earnings slightly higher at RM34.4m

KUALA LUMPUR (Feb 21): QL RESOURCES BHD []'s net profit increased by 3.8% to RM34.42 million in the fourth quarter ended Dec 31, 2011 from RM33.14 million a year ago, due to increased sales in its marine product manufacturing arm, palm oil activities and livestock farming.

It said on Tuesday, revenue increased 10.6% to RM498.96 million from RM450.95 million a year ago. Earnings per share were 4.14 sen compared to 4.20 sen.

QL said it recorded a 14% increase in sales from its surimi and surimi-based products, a 13% rise in sales of under its palm oil activities due to lower CPO prices and a 17% increase in sales contribution from farm products.

For the first nine months ended Dec 31, 2011, net profit increased 7.8% to RM100.21 million from RM92.94 million. Revenue rose 14.1% to RM1.45 billion from RM1.27 billion.



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Spotlight on China stocks

Consumer sector
Maintain overweight: The Edge Financial Daily reported on Monday that the recent listing of Chinese companies in Hong Kong at higher price-earnings ratios (PER) may spark a re-rating of China-based stocks listed on Bursa Malaysia. Valuations of these stocks are still cheap.

Right from their IPOs, China-based companies listed on Bursa are trading at huge discounts to their book values (BV) and are at very low PER.

Their weak share price performance is mainly due to investor scepticism of Chinese stocks listed in overseas bourses in view of numerous accounting issues dogging such companies listed in the US and Singapore.

The Chinese companies listed on Bursa are currently trading at extremely cheap PER of about two times.

China Stationery Ltd (CSL), slated to list on Bursa at a PER of around six times, is a China-based integrated plastic stationery company.

Compared with other Chinese companies listed here, CSL’s valuation will be at the higher end of the spectrum.



As such, a re-rating could be in store for the other listed China-based companies if CSL’s IPO is well received, which will bring public attention back to these stocks. Chinese shoe sole manufacturer Multi Sports (“buy”, fair value (FV): RM0.78), which is under our coverage, has been performing steadily and delivering within our estimates.

We are still “overweight” on the consumer sector given its resilient earnings, low beta and decent dividend yields. QL Resources Bhd (“buy”, FV: RM3.62) and Padini Holdings Bhd (“buy”, FV: RM1.42) are our top picks in the consumer space for their solid track records and decent dividend yields. — OSK Research, Feb 13


This article appeared in The Edge Financial Daily, February 14, 2012.



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OSK: 'Buy' call on QL Resources stays

OSK Research has maintained a "buy" call for QL Resources Bhd with the fair value unchanged at RM3.62, backed by the company's solid earnings track record and an on-track expansion in Vietnam and Indonesia.

In a statement today, OSK Research said QL Resources is the biggest surimi producer in Malaysia with a 50 per cent market share.

It also said that the company plans to add another new production line for Surimi and fishmeal operations in Indonesia.

"Based on this plan, starting from financial year 2013, the company will boost its production capacity to 10,000 tonnes per annum from the present 5,0000.

"The company has also expanded its integrated livestock farming by venturing into Vietnam and Indonesia," the research firm added.

"As for its palm oil division, a new crude palm oil mill in Indonesia was completed early this year, with a palm pellet plant slated for completion by the second half 2012," the research firm said.

OSK Research said the company has planted 10,000 hectares of its oil palm estates in Indonesia and is expected to complete planting on 15,000 hectares by financial year 2014.-- BERNAMA



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KLCI edges up at mid-morning, but struggles to sustain early gains

KUALA LUMPUR (Feb 2): The FBM KLCI rose at mid-morning on Thursday, in line with the gains at the key regional markets, but found it hard to sustains its gains.

At 10am, the FBM KLCI was up 7.87 points to 1,529.16, lifted by gains at select blue chips. The index had initially breached the 1,540-level in very early trade.

Gainers led losers by 388 to 188, while 287 counters traded unchanged. Volume was 628.94 million shares valued at RM519.44 million.

At the regional markets, Hong Kong’s Hang Seng Index rose 1.2% to 29,577.00, Japan’s Nikkei 225 added 0.84% to 8,883.94, the Shanghai Composite Index edged up 0.19% to 2,272.28, Taiwan’s Taiex rose 1.15% to 7,635.93, South Korea’s Kospi added 1.42% to 1,987.04 and Singapore’s Straits Times Index was up 0.44% to 2,917.59.

OSK Research director Chris Eng Poh Yoon in his February market outlook on Thursday said the research house’s January Sell call on the FBM KLCI was correct as the market dipped slightly, underperforming almost all major markets in the world.

He said its “Alternative” Top Buys also did well in January with four out of its five Top Buys outperforming the FBM KLCI, namely Supermax, JCY, Old Town and Sarawak Oil Palm

Still, markets performed better than expected and the global rally seems sustained by a flush of liquidity from the Long Term Refinancing Operation (LTRO), he said.

“As such, we are keeping a close eye on the market for the 1st half of Feb. If indeed markets continue to do well, we may be forced to abandon our Bearish stance and upgrade the KLCI to a Neutral with a preliminary year-end target of around 1,600 points.

“To note our 1,466 points current Fair Value will remain intact but it’s a Fair Value not a year-end target,” he said.

Eng said an upgrade would likely see the research house more aggressively promoting the CONSTRUCTION [] and O&G sectors, adding that for now, Consumer stocks are the flavor of the month.

“Top Buys are KPJ, MBSB, QL and Media Chinese as well as Padini which should attract interest as a cheap and good consumer stock,” he said.

On Bursa Malaysia, Petronas Gas added 52 sen to RM16.20, BAT 48 sen to RM49.88, Hartalega 47 sen to RM7.69, Ekovest 21 sen to RM2.96, Kretam and Petronas Dagangan 20 sen each to RM2.55 and RM18.30, Malayan Flour Mills 17 sen to RM4.50, United PLANTATION []s 16 sen to RM20.50, IJM Corp 14 sen to RM5.88 and Lafarge Malayan Cement up 12 sen to RM6.80.

Tebrau Teguh was the most actively traded counter after a takeover offer made by Iskandar Waterfront Holdings Sdn Bhd (IWH), which is offering 76 sen per share – or just one sen above Tebrau’s pre-suspension price of 75 sen.

The stock rose eight sen to 83 sen with 40.7 million shares done.

Other actives included Coastal Contracts, DRB-Hicom, DBE Gurney, UEM Land, Petronas Chemicals, Mudajaya and Jotech.

Decliners included Tahps, Dutch Lady, Melewar, Southern Steel, MPI, Ajinomoto, Glenealy and BHIC.



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QL Resources expanding operations in Indonesia

KUALA LUMPUR: QL Resources Bhd plans to spend US$3 million (RM9.45 million) this year to double the production capacity of its fish plant operations in Surabaya, Indonesia, while also targeting to multiply egg production in Indonesia and Vietnam by the first quarter of 2013.

The group commenced its fishery operations in Indonesia in August 2011. The plant currently processes 5,000 tonnes of surimi (fish paste) and fishmeal per year respectively.

“We will be adding two lines to the plant, each with a capacity of 5,000 tonnes for the processing of surimi and fishmeal,” Freddie Yap, group accountant and investor relations, told an investor education forum organised by Bursa Malaysia and Affin Investment Bank over the weekend.

QL Resources is currently the biggest producer of surimi, surimi-based products and fishmeal manufacturer in Malaysia with a 50% market share in the surimi segment, and 30% each in the surimi-based products and fishmeal.

The group is also a leading producer of eggs with a 12% share in the local market and has oil palm plantations in Sabah and Tarakan, Indonesia. According to Yap, QL Resources hopes to grow briskly in the next five years, riding on the aggressive expansion plans for its poultry farms in Indonesia, Vietnam as well as its oil palm plantation in Tarakan, East Kalimantan.

Its 17ha egg farm in Indonesia currently has a production capacity of 110,000 eggs per day, but the group plans to increase capacity to one million eggs per day by March 2013. Its 20ha farm in Vietnam is currently producing 80,000 eggs per day. The group is targeting production to reach 500,000 eggs per day by March 2013.

QL Resources’ venture into the plantations sector started four years ago and now it has some 20,000ha of oil palm plantations under development in Indonesia, 1,200ha of mature oil palm plantations in Sabah and two crude palm oil mills with a 600,000-tonne capacity in Tawau, Sabah.

At present, Yap explained, the trees are still very young and so the yield is still low, at around 2.56 tonnes per ha for the first quarter of this year. He expects the yields to improve strongly starting 2013 with projections of 7.37 tonnes in 2013, 11.15 tonnes in 2014 and 13.08 tonnes in 2015.

Both the egg farms and oil palm plantations in Indonesia will provide positive contributions to the group starting 2013, Yap added.


This article appeared in The Edge Financial Daily, January 11, 2012.



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It is not just the yield appeal

Consumer sector
Maintain neutral: Amid expectations of slower domestic consumption into 2012, we are overall “neutral” on the consumer space. Positively, this sector comprises resilient companies with strong balance sheets and strong cash flows.


Dividend yields are decent and average 4% across the sector for 2012, while capital management remains an ongoing theme. It is for these very reasons, however, that consumer stocks had significantly outperformed the FBM KLCI in 2011, and current valuations are fair, with the sector trading at a 2012 PER of 15.8 times.

Within the consumer sector, there are pockets of interest, retail being one of them.

While 2012 is likely to be a challenging year, our two stocks in this segment, Padini Holdings Bhd and Aeon Co (M) Bhd are likely to outperform their peers, in our view, due to strong management, their responsiveness to customer needs and strong balance sheets.

Padini’s move into Brands Outlets provides it with a whole new clientele base while Aeon’s property management division provides it with stable recurring earnings.

We have a “buy” on QL Resources Bhd for its strong earnings growth ahead, emanating primarily from its Indonesian operations. We are nevertheless “neutral” on MSM Malaysia Holdings Bhd and Beras Nasional Bhd due to price control issues that cloud their near-term outlook.

Tobacco and brewery stocks had significantly outperformed the FBM KLCI in 2011.

Tobacco and brewery stocks had significantly outperformed the KLCI in 2011. Capital management is likely to be an ongoing theme that will sustain interest in all four stocks but valuations are fair in our view. The tobacco stocks trade at a 2012 PER of 15.8 times while the brewers trade at 17.5 times. With the recent run-up, we downgrade Carlsberg Brewery (M) Bhd and Guinness Anchor Bhd to “hold” from “buy”.

We have two great companies in this category — Nestle (M) Bhd and Fraser & Neave Holdings Bhd (F&N). Trading at average 2012 PER of 23.1 times with average net yield of just 3.3%, we see little reason to own Nestle at this stage while F&N’s near-term outlook is clouded by potentially stiffer competition from Coca-Cola and Permanis Sdn Bhd. — Maybank IB Research, Jan 5



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OSK maintains neutral view on the market

TEFD: What is your outlook for the Malaysian stock market and economy for 2012?
Eng: We remain neutral on the market as we see downside potential for the global economy and the Malaysian market.

What is your target for the FBM KLCI for 2012?
We maintain our 2012 fair value for the KLCI at 1,466 points.

How do you think the euro debt crisis will play out and what impact will it have on Malaysia?
I believe there is a high chance that Greece will eventually have to default. Whether it leaves the euro region at that point is still too difficult to say. Whether or not Greece defaults, a number of European countries should slip into recession in 2012 dampening global growth and trade and thus affecting Malaysia.

The years 2010-2011 were seen as years of merger and acquisition (M&A) activities, and the government’s Economic Transformation Programme (ETP). What do you see as the domestic theme for 2012?
For 2012, it will be the election and post-election Malaysia which could well see a rollback of subsidies and how Malaysian companies will need to increase their efficiency to cope with this.

If general elections are held in 2012, how do you expect the market to react, pre- and post-election?
We found that buying just before an election and exiting one month later is the most consistent strategy for the Malaysian market, especially since we feel that there is a strong chance of the ruling coalition improving on its 2008 poll performance.

Election trading strategy should be short and tight. As such, investors should: (1) wait for profit-taking ahead of the general election before entering the market; (2) buy just before the election date and ride on the positive post election sentiment; (3) exit about one month after the election; (4) focus on blue chips in the banking, oil and gas and construction sectors rather than on so-called “election plays”.

However, we caution that the longer the government waits to hold an election, the greater the uncertainty of the results.

What sectors do you like for 2012?
Consumer, telco and healthcare.

What sectors would you avoid in 2012?
Tech and auto.

What are your top stock picks and why?
AirAsia Bhd as it benefits from lower oil price and the IPO of an associate; Axiata Group Bhd is still the cheapest telco with room for capital management; Malayan Banking Bhd — cheap and liquid bank vs return on equity; Petronas Gas Bhd — defensive with growth catalyst in liquefied natural gas; Telekom Malaysia Bhd — boosted by Unifi; Dialog Group Bhd — defensive O&G with tank terminals as its catalyst; KPJ Healthcare Bhd — hospital chain still growing strongly with re-rating catalyst from Parkway Pantai’s listing; QL Resources Bhd — replicating Malaysia’s success in Indonesia and Vietnam; Media Chinese International Ltd — benefiting from falling newsprint prices; TRC Synergy Bhd — strong exposure to the ETP via the MRT project.

Your wish list for the year?
For a free and fair election regardless of the outcome. And for racist rhetoric to be made a crime.



This article appeared in The Edge Financial Daily, January 4, 2012.



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OSK overweight on consumer sector

Consumer sector
Maintain overweight: Although we expect the tepid economic scenario in 2012 to dampen earnings, we believe consumer companies will fare better than average, mainly due to the firm demand for their products and the fact that these companies have taken the appropriate measures and learned from the last crisis in 2008/09.

During the last crisis, most consumer companies’ top and bottom lines still registered double-digit growth, fuelled mainly by promotions that spurred consumer spending and internal cost saving. Despite the heavy discounting and promotions and new opening expenses, most retail companies reported better if not flat margins from FY08 to FY10.

The same applies to food and beverage (F&B) companies, although food commodity prices spiralled upwards only after the crisis.


We expect consumer spending to remain relatively stable as disposable income increases with the country’s low unemployment of 3%. Strong retail sales amid an environment of weak consumer sentiment during the last crisis showed that retail sales are not necessarily affected by consumer sentiment, as long as unemployment remains low. Although Malaysia’s household debt-to-GDP ratio is relatively high at 76%, the overall household balance sheet remains sound.

Given that food and beverage demand is expected to be firm and sales resilient, the financial performance of F&B companies will depend mainly on the fluctuations in food commodity prices and their ability to keep manufacturing costs low.

As economic conditions deteriorate, we expect prices to decline further, although they are unlikely to go back to their previous lows. In the event food commodity prices stay high, F&B companies would not be substantially affected given their ability to cope with the high raw material costs post the 2008/09 crisis, as well as a stronger US dollar against the ringgit.

Given our view that the share market should weaken in the near term due to global economic headwinds, the consumer sector — known for its resilient earnings, low beta and decent dividend yields — will be among the safer bets. Hence, we maintain overweight on the consumer sector.

QL Resources Bhd (“buy”, fair value: RM3.62) is our favourite stock for its uninterrupted earnings growth in the past 20 years and rising operating profit margins since 2004. We also like Padini Holdings Bhd’s (“buy”, FV: RM1.42) attractive valuation and good dividend yield. — OSK Research, Dec 27



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QL Res, Padini are OSK's consumer top picks

OSK Research said consumer companies will fare better than on average, despite the tepid economic scenario in 2012, which is expected to dampen earnings.

In a research note today, OSK Research said this was mainly due to firm demand for their products, and the fact that the companies had taken appropriate measures while having learnt from the last crisis in 2008/09.

The research company also expects consumer spending to remain relatively stable as disposable income increases, amid the country's low unemployment of three per cent.

"The financial performance of food and beverage (F&B) companies depends mainly on fluctuations in food commodity prices and their ability to maintain low manufacturing costs," it said.

OSK Research is maintaining its overweight recommendation on the consumer sector, with its top picks being QL Resources Berhad, for its uninterrupted earnings growth, as well as Padini Holdings Bhd, for attractive valuation and good dividend yield. -- Bernama



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OSK Research: 2012 Outlook – be nimble in the “way of the market”

KUALA LUMPUR (Dec 25): OSK Investment Research has a Neutral outlook on the Malaysian market going into 2012 as the combination of uncertain growth outlook in the US and Asia coupled with a positive recession in Europe cloud the prospects for strong earnings growth locally.

Its director Chris Eng in his 2012 market outlook strategy report on Dec 23 said that while Malaysia would likely avoid slipping into a recession, the deficit reduction exercises undertaken by Eurozone economies may well tip their slow growing economies into a recession.

“In any case, for Malaysia, we see earnings growth slipping to between mid single digits and low double digits, a pale shadow of what it was in 2006, 2007 and 2010 when earnings growth came in between 20 to 30%,” he said.

Eng said newsflow on developments surrounding the handling of sovereign debt in Europe and the US would also likely lead to volatile markets worldwide, adding that in the short term, volatile markets will likely give way to a dampened economic outlook.

“We advise investors stay cautious into mid 2012 and focus on Defensive sectors such as Consumer, Telco, Healthcare and Media.

“Our 2012 KLCI fair value is 1,466 points based on a PER of 13.5 times or 1 standard deviation below the historical average of 16.6 times given the uncertain market conditions,” he said.

At the same time, when trading opportunities present themselves, Banks, O&G and CONSTRUCTION [] should come into play, he said.

Eng said OSK Research was Overweight on 7 sectors, Neutral on 9 and Underweight on 2 sectors.

“In terms of our Top Buys, they reflect this overall strategy.

“Six of our Top Buys, namely Axiata, PetGas, Telekom Malaysia, QL Resources, KPJ Healthcare and Media Chinese reflect our Defensive Strategy while 2 others are from our Alternative Defensive Buys namely AirAsia and TRC Synergy,” he said.



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QL sees 2QFY12 earnings improve by 15%

KUALA LUMPUR: QL Resources Bhd saw net profit for 2QFY12 ending March 31 increase by 15.2% year-on-year (y-o-y) to RM38 million or 4.57 sen a share from RM33 million on the back of higher earnings by its integrated livestock farming division and palm oil activities.

Pre-tax profit for QL’s livestock and palm oil division saw an increase of 32% and 235% respectively for 2Q.

Revenue likewise grew from RM438.7 million to RM495.2 million, which is equivalent to a y-o-y increase of 12.9%. Sales for the livestock division rose by 18% to RM293.1 million from RM247.9 million previously.

According to the notes accompanying the announcement, QL saw an improvement in its livestock segment as a result of higher unit price of raw feed material as well as partly from the recognition of investment in associate Lay Hong Bhd.

“Our palm oil segment saw an improvement mainly due to improved crude palm oil prices, which stood at RM3,090 per tonne for 2Q compared with RM2,590 for the previous corresponding quarter as well as a new contribution for associate Boilermech Bhd,” QL said.

However, QL’s marine product farming division did not perform as well, with pre-tax profit falling 22% y-o-y to RM15.6 million in 2Q and revenue dropping 3% to RM114 million. According to QL, the drop was the result of lower fish landing.

On a cumulative basis, for the first six months of FY12, QL’s net profit rose to RM65.8 million or 7.91 sen a share, from RM59.8 million, while revenue grew 15.4% to RM949.8 million. However, once again QL said that its earnings were impacted by its marine product farming segment.

“Performance for our 1HFY12 results was adversely affected by poor fish landing, especially in Sabah water as well as keen competition in raw material trade. The operating environment was also challenging due to volatile commodity prices, fluctuating currency exchange and uncertainties in the world economy,” said QL.

While QL is expecting the second half of the year to be challenging, it noted that it has seen some improvement in fish landing for 3QFY12.

“We are also expecting to see some contribution from our fishery, poultry and palm oil operation in Indonesia in the fourth quarter. Thus, we are cautiously optimistic on the group’s performance for the second half,” said QL.


This article appeared in The Edge Financial Daily, November 22, 2011.



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Poultry stocks start to hatch?

KUALA LUMPUR: Poultry companies are not the first thing that typically come to mind when someone is looking for a stock to buy. Long viewed as unexciting and small with volatile earnings, the sector has largely been shunned by investors.

Sentiment was further dented by outbreaks of bird flu. But there are good reasons to change that perception. Many poultry stocks are trading at low single digit multiples and below book value. Add an ongoing industry consolidation, the end of bird flu and rising chicken and egg prices, the bigger companies may end up much more profitable as economies of scale set in. This could well trigger a re-rating of the sector.

Over the past year, poultry-related stocks have proven to be fairly resilient compared to the general market. Many, particularly those mainly involved in egg production, have hatched some good returns despite the weak broader market, as their earnings in recent quarters have shown a marked improvement.

Using as a benchmark the FBM KLCI, which fell by 3.9% to 1,468.75 last Friday from 1,528.01 a year ago, poultry stocks have performed relatively well.

Year-to-date Huat Lai Resources Bhd has gained 45.3%, Farm’s Best Bhd (38.6%), TPC Plus Bhd (18.8%), Teo Seng Capital Bhd (14.1%), CAB Cakaran Corp Bhd (11.1%), Lay Hong Bhd (2.3%), LTKM Bhd (0.5%), QL Resources Bhd (0.3%), while Leong Hup Holdings Bhd has shed 4.2%.

Most poultry counters are trading at a low price-earnings ratio (PER), below book value and have small market capitalisations.

Seven stocks, Teo Seng, Huat Lai, Farm’s Best, CAB Cakaran, Lay Hong, Leong Hup, and LTKM are trading at single digit PER, as low as 3.35 times for Farm’s Best, while seven stocks are trading below their book values. This makes them attractively priced yet fairly defensive stocks in an uncertain market.

“It would not be surprising if they become acquisition targets,” said an industry observer, adding that they have shown good growth over the last few years and there have been increasing mergers and acquisitions in the sector.

Among the names to watch, industry observers say, are Teo Seng, Huat Lai, Lay Hong, LTKM and Farm’s Best, as these stocks are trading at low PER and price-to-book valuations (P/BV).

As economies of scale improve through expansion, M&A or improved efficiency, earnings will expand and their already low PER could decline.

Market observers think Teo Seng deserves a look as the company has an excellent profit track record, unlike many of its peers, having chalked up compound annual growth rate (CAGR) for revenue and net profit of 9.2% and 20.8% since it was listed in 2008. Despite being one of the best performing stocks within the sector, its valuations are still low with a trailing PER of 5.31 and P/BV ratio of 0.93 times.

Another poultry company to note is Huat Lai, the country’s largest egg producer, which also chalked up the largest stock performance gains among its peers. Its stock has returned 45.3% over the past year and is still trading at a low trailing PER of 3.72 and decent P/BV of 1.34 times. Although its net profit in the past five years has been shaky, many say that once its proposed acquisition of TPC goes through, synergies should smoothen things out.


Under the new parentage of QL Resources, the fourth largest egg producer, Lay Hong has a more promising outlook coupled with good earnings growth in the past few years. Although its stock returned a mere 2.3% in the past 52 weeks, its reasonable PER of 5.62 times and P/BV of 0.71 times should still appeal to investors.

Investors seeking a company with recent good growth might want to consider LTKM, the fifth largest egg producer. Its CAGR from 2007 to 2011 came to 15.2% for revenue and 31% for net profit. It was trading at a trailing PER of 5.1 times and had a P/BV of 0.63 times.

Also deserving a mention is Farm’s Best, with its diverse range of poultry-related operations and recent expansion. The stock has returned 38.6% over the year, trades at a trailing PER of only 3.35 and at half book value. It has recently entered into two sales and purchase agreements to acquire two broiler farms, which will increase its broiler production by about 6% and is expected to contribute about RM16 million in annual revenue from 1Q12 onwards.

Positive industry outlook
On a macro perspective, the poultry industry has an encouraging long-term outlook given the strong demand for its products, coupled with increasing prices and Malaysians being one of the biggest consumers of eggs in the world.

The number of table eggs produced in Malaysia has grown 49.69% from 5.72 billion in 2000 to 8.57 billion in 2010, according to data from the Federation of Livestock Farmers’ Associations of Malaysia (FLFAM).

While the annual growth of 4.12% is modest, it has outpaced the country’s population growth of about 2.02% annually.

As for egg consumption, Malaysia ranks as one of the highest globally with an average consumption per capita of 320 eggs annually, compared with 250 in the US.

The majority of eggs produced are consumed domestically, but there is also growing demand for exports, which accounted for 14% of total production in 2010, according to an article in the November 2011 edition of Poultry International. The bulk of these exports went to Singapore (63.9%), while the remaining markets include Indonesia and Hong Kong.

Despite the billions of eggs produced, producers reportedly enjoy a gross margin of only one sen an egg, on average.

According to the article, the annual ex-farm price per egg was 30 sen in 2010 with production costs running at 29 sen. This puts the value of 2010’s egg production at RM2.57 billion, but with implied gross profit of only RM85 million.

Given the slim margins, poultry players appear, since late last year, to be positioning themselves to achieve higher economies of scale through M&A.

And it is a game where the biggest and most efficient players make the money, and the smaller ones are either loss-making or being weeded out.

Indeed, the slew of recent M&A is creating some excitement in the sector, throwing the spotlight on undervalued companies and triggering consolidation exercises that may well produce stronger, more profitable and potentially exciting players.

It is also noteworthy that egg prices have been on the rise this year, especially over the last month, which should be positive for margins. According to the Federation of Livestock Farmers’ Associations of Malaysia, the price of ex-farm Grade A eggs has risen by 16.7% from 30 sen per egg in early October to 35 sen on Nov 14.

M&A galore
For a sector that’s normally quiet, there has been a relatively large number of M&A over the past year.

It started in August 2010, with QL Resources Bhd buying a 23.29% stake in Lay Hong Bhd for RM48.55 million.

Last month, Huat Lai proposed to acquire a 35.65% stake in TPC for RM8.08 million.

Interestingly, the stakes of Lay Hong and TPC were sold by the same company, London Biscuits Bhd (Lonbisco) -- a confectionery maker.

In between, there was Leong Hup Holdings (an integrated poultry operator) and Emivest Bhd (mainly involved in livestock feed), receiving an offer in November 2010, totalling RM426 million from a major shareholder, Emerging Glory Sdn Bhd, to acquire all their assets and liabilities.

According to a news report last month, Leong Hup has still not decided when it will call an EGM to deliberate on the proposed takeover, but it could likely have it in the last quarter of the year or 1Q12.

Integration: Vertical or horizontal?
Interestingly, when Lonbisco bought into Lay Hong and TPC in Nov 2006 and Feb 2010, its rationale then was to ensure an adequate, regular and continuous supply of eggs at a “controlled price” to meet its ongoing expansion plans. Lonbisco is a manufacturer of cakes and confectionery.

It did not provide a rationale for disposing of its stakes but industry observers believe that the investments did not provide effective synergies.

According to an analyst, unlike Lonbisco, Huat Lai and QL will enjoy cohesive synergies as they are acquiring companies which have similar operations to their own.

He said the companies will achieve synergies from raw material sourcing arrangements, supply chain networks and operational efficiency.

The synergy between Lonbisco and the poultry companies, he explained, may not have been that effective because eggs, although a major ingredient in London Biscuit’s products, did not account substantially for its product costs.

In contrast, the analyst said, KFC Holdings (M) Bhd is an example of a synergy that worked well. He said KFC restaurant’s main product, chicken, accounts for a large part of its product costs and is backed by the company’s fully integrated poultry operations.

KFC’s wholly-owned subsidiary, Ayamas Integrated Poultry Industry Sdn Bhd, is involved in breeder and broiler farms, hatchery, and feedmill. KFC also has wholly-owned subsidiaries that have plants for processing and further processing poultry.

KFC’s integrated poultry operations in 2010 had an inter-segment revenue of RM287.88 million, which accounted for 35% of the segment’s total revenue of RM821.28 million.

The total revenue for KFC’s integrated poultry operations has grown by 16.5% annually from 2006 to 2010.

Given that margins in the egg business are slim, it would therefore make better sense for players to merge and gain economies of scale, rather than food producers acquiring them for vertical integration.


This article appeared in The Edge Financial Daily, November 14, 2011.



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Choice of some egg players

Teo Seng Capital Bhd
One of the best performing poultry stocks is Teo Seng, the third largest egg producer in the country.

Closing at 48.5 sen last Friday, the counter has gained 14.1% over the past year. It had a market capitalisation of RM97 million and a trailing price-earnings ratio (PER) of 5.31 times. Its book value at end-June was 52 sen, placing the stock at a price-to-book ratio of 0.93 times.

An integrated poultry company, Teo Seng produces 2.2 million eggs daily and is involved in layer farming, manufacturing and marketing of paper egg trays, animal feeds and distribution of animal health products.

Since its listing on the then Second Board of Bursa in 2008 until 2011, Teo Seng has chalked up compound annual growth rates (CAGR) for revenue and net profit of 9.2% and 20.8%.


For its 1QFY12 ended June, Teo Seng’s net profit increased year-on-year (y-o-y) to RM4.76 million from RM4.19 million previously, while its revenue grew to RM61.28 million from RM43.72 million.


Huat Lai Resources Bhd and TPC Plus Bhd
Among the next best performers were Huat Lai and TPC Plus. Industry observers say that once Huat Lai’s acquisition of TPC Plus goes through, both companies will enjoy better financial results from better economies of scale.

Last month, Huat Lai proposed to acquire a 35.65% stake in TPC Plus for RM8.08 million from London Biscuits Bhd.

Huat Lai, with a trailing PER of 3.72 times and market capitalisation at RM185.6 million, was up by 45.3% to RM2.15 from a year ago. It is trading 34% above its book value of RM1.61 as at end-June.

An integrated poultry operator, Huat Lai is Malaysia’s top egg producer with a daily output of three million eggs, while TPC, which focuses on eggs, produces 500,000 eggs daily.

Huat Lai’s revenue has been on an upward trend over the past five years, reaching RM611.76 million in 2010 from RM220.25 million in 2006.

However, its profit trend has been inconsistent, but results were promising in the last two years.

Huat Lai returned from a net loss of RM8.96 million in 2006 to a net profit of RM2.12 million in 2007, before going into the red again with a net loss of RM12.56 million in 2008 and then returning to a net profit of RM10.4 million in 2009 and RM24.59 million in 2010.

TPC had a decent share price increase of 18.8% from a year ago to 28.5 sen last Friday. It had trailing PER of 17.27 times and market capitalisation of RM22.8 million — one of the smallest among poultry counters. As at end-September, its book value was 39 sen.

TPC was loss-making from FY06 to FY09. But, for the 18 months from Jan 1, 2010 to June 30, 2011 (TPC changed its FY from Dec 31 to June 30, this year), the company posted a revenue of RM73.55 million and net profit of RM605,000.


Farm’s Best Bhd
Farm’s Best’s stock was up by 38.6% from last year, closing at 79 sen last Friday. The company has enjoyed strong earnings in the past few quarters and has a trailing PER of 3.35 times and a relatively small market capitalisation of RM43.87 million. The stock is also trading at less than half its book value of RM1.58, as at end-June.


Farm’s Best has poultry operations spanning hatchery operations, feed, poultry processing, medications and vaccines, and food products (nuggets, burgers, sausages and so on).

It recently entered into two sale and purchase agreements to acquire two broiler farms in Negri Sembilan.

The two farms have a total capacity of 400,000 birds and are expected to produce about 2.2 million broilers a year, which will increase Farm’s Best’s broiler production by about 6%, the company told TEFD.

Annual revenue from the farms is expected to be about RM16 million and contributions will be from 1Q12 onwards.

Farm’s Best said its live broiler sales and processed poultry accounted for about 97% of its revenue with the rest coming from egg production.

For its 2QFY11 ending June, it reported a 103% y-o-y increase in net profit to RM4.24 million from RM2.09 million previously. Revenue climbed 16.5% to RM94.92 million from RM81.5 million a year ago.

Revenue and net profit for the first six months of 2011 stood at RM189.38 million and RM7.25 million, respectively.

Notably, Farm’s Best’s net profit for the first half of 2011 has more than doubled compared with the full year’s total for 2010.

The company returned to the black in 2010 with a net profit of RM3.6 million from a loss of RM4.64 million in 2009, although revenue declined to RM331.16 million from RM346.34 million.

The improved results were due to the softened prices of imported feed, it said.


CAB Cakaran Corp Bhd
CAB is mainly involved in integrated poultry farming and processing. Its stock has climbed 11.1% since last year to close at 35 sen last Friday.

It traded at a trailing PER of 4.13 times and had a market capitalisation of RM46.1 million. As at end-June, its book value was 71 sen.

After climbing out from a net loss of 10.73 million in FY06 ending Sept 30, CAB’s financial results have been promising.

For its FY10, its net profit increased y-o-y to RM7.7 million from RM22,828 previously, while revenue increased to RM508.15 million from RM494.42 million, due to higher average ex-farm price of broilers and better cost management, said the company.

Also due to better profit margins in broilers, CAB in its 3QFY11 ending June, posted a 107.5% increase in net profit to RM4.44 million from RM2.14 million a year ago. Revenue dipped marginally to RM122.29 million from RM123.05 million previously.

Its poultry operations accounted for almost 90% of revenue in 2010. It also has operations in restaurant & franchising and marine products manufacturing but these divisions suffered losses in 2010 with pre-tax losses of RM180,000 and RM400,000, respectively.


Lay Hong Bhd
Lay Hong is the fourth largest egg producer at 1.5 million eggs daily. Its stock increased slightly by 2.3% since last year to close at RM1.79 last Friday.

It has a market capitalisation of RM88.9 million and traded a trailing PER of 5.6 times.

Its book value at the end of June was RM2.53.


The company has reported consecutive y-o-y increases in net profit and revenue since FY08. For the FY11 ended March, it reported a 43% y-o-y increase in net profit to RM14.76 million from RM10.33 million. Revenue increased to RM423.11 million from RM388.75 million last year.

An integrated poultry company, Lay Hong is mainly involved in the production of eggs, broiler breeding and farming and feedmill activities. In Aug 2010, QL Resources Bhd bought a 23.29% stake in Lay Hong Bhd for RM48.55 million, or RM1.05 per share, from London Biscuits Bhd.


QL Resources Bhd
Integrated and diversified agriculture player QL Resources is highly regarded by analysts and won The Edge Billion Ringgit Club’s “Company of the Year” award for 2011.

Its share price only increased marginally by 0.3% since last year to close at RM2.93 last Friday, but it has been enjoying double-digit growth for the past decade. In its first 10 years as a listed company — from 2000 to 2010 — the company achieved a 10-year average return on equity (ROE) of 23% as well as a 23% annual gain in its share price.

At current prices, the stock is trading at a trailing PER of 18.8 times and has a market capitalisation of RM2.44 billion. Its book value as at end-June was 92 sen.

QL is the second largest producer of eggs in Malaysia with a production of 2.7 million eggs daily. The livestock division accounted for roughly 56% or RM991.03 million of its total revenue in FY2011.

The company’s other activities are surimi or fish paste manufacturing and palm oil.

QL’ s growth over the past five years has been impressive. Its CAGR from 2007 to 2011 for revenue and net profit was 12.3% and 18% respectively.

For FY11, it posted net profit of RM124.55 million on revenue of RM1.78 billion.


Leong Hup Holdings Bhd
Leong Hup Holdings’ (LHH) stock fell by 4.2% to RM1.60 from a year ago. It had a market capitalisation of RM283.3 million and a trailing PER of 5.2 times. Its book value at the end of June stood at RM2.37.

One of the industry’s largest and oldest players, LHH is the biggest day-old chick producer and also the biggest broiler distributor in Malaysia, industry sources say.

Its key activities are breeding and rearing of parent stocks, broiler day-old chicks, contract farming, slaughtering and processing of broiler chickens and retailing.

LHH also has a 27.74% effective ownership in Teo Seng, according to its 2011 annual report.

LHH has a 0.62% direct stake in Teo Seng, while its 51% owned subsidiary, Advantage Valuations Sdn Bhd has a 51.12% stake in Teo Seng.

For FY11 ended March 31, LHH’s revenue rose 18.4% to RM1.35 billion from RM1.14 billion in FY10. Net profit climbed by 40.4% to RM47.91 million from RM34.12 million previously.

For its 1QFY12 ended June, LHH reported a y-o-y jump in net profit to RM14.2 million from RM10.05 million previously. Revenue increased to RM420 million from RM294.8 million a year ago.


LTKM Bhd
Closing at RM1.89 last Friday, LTKM’s share price was up only by a marginal 0.5%. But its share price has been rising and more than doubled since 2009.

LTKM had a trailing PER of 5.1 and a market capitalisation RM82 million last Friday. It was trading 37% below its book value of RM3 (as at end-June).


With operations predominantly in egg production, LTKM is Malaysia’s fifth largest egg producer with an output of 1.2 million eggs a day.

In the period from 2007 to 2011, its CAGR for revenue and net profit was 15.2% and 31%.

The company is also involved in the mining and trading of sand, and manufacturing and sale of processed glass.

But both activities accounted for less than 3% of its FY11 revenue.

In its FY11 ending March, LTKM posted a net profit of RM16.01 million on the back of RM150.49 million in revenue.

For its FY10, its net profit increased to RM7.7 million from RM22,828 previously, while revenue increased to RM508.15 million from RM494.42 million, which the company attributed to higher average ex-farm price of broilers and better cost management.


This article appeared in The Edge Financial Daily, November 14, 2011.



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QL Resources pays 30% more

QL Resources Bhd’s subsidiary has paid over 30 per cent more for transactions with a related party, it told Bursa Malaysia Bhd yesterday.

QL Endau Marine Products Sdn Bhd deviated from the amount approved by shareholders due to its belief that an increase in total vessels will increase total fish.

The deviation was also because the purchase of frozen fish from Timurikan is new for the subsidiary’s business for direct re-export.