Is QL Resources in for more M&As?

Monday August 30, 2010
By LEE KIAN SEONG

Market is concerned about firm’s financial capability, the prospects of its local and regional expansion

QL Resources Bhd, which announced its merger and acquisition (M&A) exercise last Monday, has been in the spotlight as there is wide speculation going around that the company might be pursuing more M&As going forward.

QL managing director Chia Song Kun said last Tuesday that the company would look into more M&As if there was something in the market that could benefit the company.

However, the questions are: Is the company able to pursue further M&As with its current financial capability and what are the earnings prospects going forward given its aggressive expansion plans locally and regionally?

According to Bloomberg data, the company’s market capitalisation stands at RM1.81bil. Its share prices have risen 40.3% to RM4.56 year-to-date.

The company announced its acquisition of a 23.29% stake in rival company Lay Hong Bhd for total consideration of RM11.6mil last Monday.

Lay Hong is mainly involved in the production of eggs, broiler farming and feedmill activities. It has also ventured into retail business in Sabah and currently operates eight supermarkets under the trade name G*MART.

Meanwhile, QL is a diversified resource and agricultural-based group with three core principal activities – marine products, manufacturing, integrated livestock farming and crude palm oil milling.

The acquisition of Lay Hong, which is in similar businesses, will enable QL and Lay Hong to achieve synergies from feed raw material sourcing arrangements, supply chain networks and operations efficiency.


Kenanga Research is factoring seven months of contribution from the new associate or RM1.7mil for the financial year ending March 31, 2011 (FY11) and another RM2.8mil for FY12 in its forecast.

QL has set aside RM400mil over the next two years to expand its poultry, fishing and oil palm planting businesses.

The company is expanding its business in Vietnam and Indonesia, with investment of US$10mil and US$20mil respectively. It is also investing about RM25mil to build biogas and biomass plants at its Sabah palm oil mill to turn waste into green energy.

It will also spend US$15mil to install a mill for its East Kalimantan oil palm estates.

It was reported last year that the company aimed to triple its profit contribution from palm oil operations by 2015 as it was bullish about the long-term growth outlook for the commodity.

Despite the high capital expenditure going forward, the company said it would continue to pay out 25% to 30% of the group profits as dividends. The market is concerned whether QL can really maintain this policy with such expansion plans.

An analyst from a local brokerage said QL’s management had shown its interest in M&A and always kept its options open.

However, it is hard to judge whether the company would undertake M&A activities soon.

“It would probably acquire layer farms rather than listed entities. With its net profit of over RM100mil a year, the acquisition of layer farms, is possible and the company has been doing that for many years,” she said.

She said given the gearing level of about 0.6 times with a large portion of it for feed trading business, the company still had plenty of room to take up more loans.

“QL has very strong free cashflow generation and I don’t see a problem for it to finance their acquisition. It also has good track record in getting loans,” she said.

According to QL’s annual report, its cash and cash equivalents as at the end of FY10 stood at RM106.1mil, compared with RM68.3mil a year ago. Its loans and borrowings stood at RM215.4mil in FY10, compared with RM163.1mil in FY09.

Another analyst from a local research house said she did not expect QL to conduct further M&A activities in the near-term as the company was now actively expanding its businesses.

“If it is looking for M&A, it might be in the Phase II expansion in its Surabaya plant. It might want to explore opportunities for value-added products and look for acquisition in this area or start a greenfield project.

“However, it would not happen in the near term,” she said.

She said the company would have banks lined up for its expansion or acquisition funding.

On its earnings prospects, Kenanga Research raised QL’s FY11 net profit forecast by 6.3% and 6.6% for FY12 to account for the stronger surimi prices, crude palm oil prices and new earnings stream supported by improving economic conditions.

OSK Research said the construction of QL’s Surabaya surimi plant and day-old chick breeder farm as well as Vietnam livestock farm had begun and the units were expected to start contributing in FY12.

“We are somewhat positive on the expansion in Indonesia and Vietnam as they will boost revenue of its marine products manufacturing segment and Vietnam layer farm by 16.5% and 3.1% respectively, taking into account the time taken to ramp up capacity and production,” the research house said.

OSK likes QL’s resilient business as well as strong management team, which will continue to drive growth in all its three core segments.

It reiterates its “buy call” on QL, given the 13% price upside on the stock.

QL posted slightly higher net profit of RM26.8mil in the first quarter ended June 30, compared with RM22.3mil in the same period last year.

Its revenue was lower at RM356.34mil, compared with RM364.49mil previously.

For FY10, QL registered a net profit of RM115.1mil, 19% higher than RM96.7mil in FY09. Its revenue rose 5.7% to RM1.48bil.