QL less affected by challenges in livestock farming industry

PETALING JAYA: QL Resources Bhd’s transition out of the palm oil business to focus on environmental, social and governance (ESG)-friendlier operations could see the group restructuring its plantation assets, according to UOB Kay Hian (UOBKH) Research.

The palm oil operations of the integrated agro-based group involve three crude palm oil (CPO) mills and 16,200ha of oil palm estates, mainly in Eastern Kalimantan, Indonesia.

“QL is expected to eventually restructure its plantation assets, which could monetise decent value. However, we throw caution to the wind on the timing and value of the disposal, as it requires minority approval from QL’s Indonesia partners,” UOBKH Research said in a report.

The research firm noted that QL’s balance sheet was robust with a net gearing of 0.23 times for the financial year 2023 (FY23). Hence, it did not think QL was in dire financial need to retain the potential disposal proceeds.

“By our estimates, should the proceeds be declared as a special dividend, it could translate up to 3% in yield,” added UOBKH Research.

QL has a 52.6% stake in Boilermech Holdings Bhd – a company that is focused on industrial clean energy and water treatment and solar energy needs. But earnings visibility of the subsidiary is clouded by pressure on margins, said UOBKH Research.

“We gather that Boilermech’s recent third-quarter FY22 earnings were sluggish due to slower project progression that was borne out of a shortage of staff. Although its order book remains robust, it is likely to face near-term headwinds due to pressure on its margins.”

On the other hand, the group’s integrated livestock farming (ILF) segment should continue to realise decent contributions over the near term.

The research firm said QL was less affected by headwinds in the livestock farming industry following the recent increase in corn and soybean prices.

“This uptick, combined with cost pressure from the change in minimum working hours, will continue to weigh on (producers’) margins.

“Positively, the government’s subsidy of eggs remains in place until June. As a result, the (ILF) segment is expected to remain profitable,” it added.

Apart from this, UOBKH Research said small egg producers in Peninsular Malaysia (representing an estimated 15% of industry supply) have halted production and may take up to nine months to restart operations.

Meanwhile, the group’s regional operations, notably in Vietnam, continue to thrive from structural growth.

This confluence of factors, according to UOBKH Research, will support robust ILF contributions heading into FY24.

As for Family Mart, it will continue to be the impetus of growth, driven by plans to to rollout more stores.

“QL intends to increase the store count of Family Mart by 60 stores per annum going forward, towards Tier 2 cities, outside of the Klang Valley. Apart from that, QL will also focus on revamping existing stores as Family Mart nears its seventh year of operations in Malaysia,” the research firm added.

However, UOBKH Research said the stock’s valuations were now relatively lofty at 40.7 times, which may have been catalysed by its inclusion into the FBM KLCI index. “We maintain our ‘hold’ recommendation with an unchanged target price of RM6.20,” it said.

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