QL Resources Bhd’s recent acquisition of 40.51% equity interest in Boilermech Sdn Bhd was seen as a breakthrough of sorts for the group, given that the exercise is its first palm oil-related acquisition since its listing 10 years ago.

The RM29 million acquisition is QL’s latest effort to widen its footprint in the palm oil business, which contributes less than 20% to the group’s revenue.

Analysts are positive on QL’s move to buy Boilermech, which is primarily engaged in the manufacture of boilers. Its speciality is in biomass boilers. Over the past decade, QL has acquired mostly poultry-related assets or marine-based businesses valued at more than RM100 million. Each of these purchases was smaller in value, below RM16 million, except for the RM43.6 million acquisition of QL Feedingstuffs Sdn Bhd in 2000.

QL derives 56% of its income from integrated livestock farming and 24% from marine products manufacturing while 18% comes from the palm oil segment.

In FY2010 ended March 31, the palm oil segment’s turnover was up 2% to RM273 million, but profit was lower at RM8 million against the previous year’s RM10 million. The reduction in profit was mainly due to a squeeze on its oil milling margins resulting from lower extraction rates as well as competition for fresh fruit bunch supply.

However, in the long term QL expects its Indonesian operation to have significant earnings contribution by FY2012, or at the latest by FY2013.

QL has two palm oil mills in Sabah and 1,214ha (3,000 acres) of mature oil palm plantations around Tawau, Sabah. With its joint venture partner, it has 30,000 acres of oil palm plantations in Eastern Kalimantan, Indonesia, of which 18,500 acres had been planted as at June.

Boilermech adds value
If QL’s acquisitions over the past 10 years are taken as a guide, the Boilermech investment could be as fruitful and add value to its existing businesses.

Some analysts even expect QL to eventually acquire a bigger stake in Boilermech, once it can prove that it can derive better value from the latter in the longer term.

OSK Research opines that while the investment will not contribute significantly to QL’s bottom line in the immediate term, the acquisition serves as an extension of QL’s palm oil division from upstream to downstream.

“More importantly, the group is convinced there is huge potential in the biomass renewable energy business in the very near future,” it says in a recent note.

Maybank Investment Bank says Boilermech can provide the engineering services that QL will need if it is to partner with other palm oil millers for its green energy project, converting empty fruit bunches into high-value palm pellets for renewable energy.

Given that Boilermech has a presence in Malaysia, Indonesia, Thailand and the Ivory Coast, analysts opine that QL could also ride on the high demand for biomass boilers there in the future.

In fact, Boilermech has been supplying boilers to QL’s marine product and palm oil divisions. It also services Wilmar International Ltd and Sime Darby Bhd.

Based on Boilermech’s FY2010 net profit of RM12.3 million, QL is acquiring Boilermech at a PER of 5.9 times. Given that QL is trading at a FY2010 PER of 17.4 times, the acquisition is therefore value enhancing, analysts say. 

RHB Research, meanwhile, believes the price is fair given that Boilermech’s closest peers — CB Industrial Product Holding Bhd and Muar Ban Lee Group Bhd — are currently trading at PERs of 8.5 times FY2010 and 2.9 times FY2009 respectively.

The house also estimates the acquisition will contribute approximately 1% or 2% to QL’s bottom line for FY2011 and 3% or 4% for FY2012.

The acquisition will be financed by internally generated funds. QL has total cash of  RM66 million as at June 30. Its net gearing has improved from 0.7 times as at June 30, 2009, to around 0.6 times as at June 30, 2010.

OSK Research notes that QL is able to manage its debts and expansion given its healthy interest coverage ratio of 10.8 times as at FY2010.

QL’s investor relations officer Freddie Yap says: “We are comfortable at at 50% long-term debt-to-equity ratio. With our current expansion we are still below this threshold.” He adds that QL has no more acquisition plans in the short term after Boilermech.

However, QL has not completely put the brakes on its expansion. It has planned capital expenditure of RM400 million over the next two years to set up poultry farms, build more deep sea vessels, plant more oil palm and build a mill in Indonesia.

Given the pace of its expansion, it is probably timely for QL to consider another round of fundraising soon. After all, it has not raised funds on the equity market since 2006.

Asked to comment, Yap replies, “We are very proud that we have not raised any funds through rights issues since we were listed in March 2000.

“We did a private placement in 2006. We have the mandate from shareholders to carry out a private placement but we have yet to decide on any share placement currently.”

Given the improving prospects on palm oil prices, QL’s purchase of the Boilermech stake certainly looks timely as it ventures further into palm oil-related businesses.

This article appeared in Corporate, The Edge Malaysia, Issue 828, Oct 18-24, 2010