QL Resources - BUY - 22 May 2008

QL Resources - FY08 results just above estimates (Results Note)



Price: RM4.30

Target Price: RM5.35

Recommendation: BUY



· FY08 net profit of RM80.8m came in slightly above our forecast of RM75.8m by 7%, and above consensus estimate of RM73.5m by 10%. The higher FY08 net profit came mainly from larger earnings contribution from the integrated livestock farming (ILF) division. All business segments recorded stronger earnings though.

· Elevated price of feed commodities and poultry products largely responsible for the YoY, FY08 net profit increase of 28%. ILF's FY08 pretax profit rose by 37% driven by higher selling price of animal feed raw materials traded, as well as the higher price of poultry products (eggs in particular). The pretax profit of the marine products manufacturing (MPM) and CPO milling (CPOM) divisions increased by 16% and 7% due to higher price of surimi and CPO.

· Greater contribution from Sabah plantation and high CPO price, as well as higher price of marine products resulted in YoY, 4QFY08 net profit rising by 22%, on the back of a 23% increase in revenue. Pretax profit from the CPOM division was 119% higher YoY due to larger yield from QL's maturing 3,000 acre plantation and high price of CPO.

· QoQ, the 11% decline in 4QFY08 net profit is in line with traditional seasonality. The monsoon weather reduced fish catch and lowered FFB harvest, resulting in a 21% and 13% QoQ decline in MPM and CPOM pretax profit. The ILF segment's pretax profit also decreased by 8% due to the lower volume of feed commodities traded.

· Final dividend of 13% proposed under the single-tier tax system. The 6.5 sen FY08 DPS is slightly lower YoY (by 9%) than FY07 net DPS of 7.3 sen as the firm conserves cash for its aggressive expansion plans that include a Vietnamese layer farm, Indonesian plantation, and prospective marine plants in Sarawak and Indonesia.

· Revising FY09 and FY10 net profit estimates upwards by 7% for both years to take into account higher contribution of the ILF division. We are raising our FY09 and FY10 estimates for the price of poultry products by an average of 5%, and increasing the FY09 and FY10 FFB yield for QL's Sabah plantation to 15mt/acre from 10/mt acre.

· Re-iterate our BUY recommendation with revised target price of RM5.35 utilising our previous 12x PER applied to raised FY09 EPs of 44.7 sen. Any FY09 earnings surprise is likely to be on the upside as QL's acquisitions begin to bear fruit.







KENANGA INVESTMENT BANK BERHAD (15678-H)