QL Resources Bhd, a member of The Edge Billion Ringgit Club (BRC) comprising companies with a market capitalisation of at least RM1 billion, has humble roots.

Chia Song Kun, the group’s founder and managing director, is the third of nine sons in a family of fishermen. Despite his modest background, Chia become a lecturer of mathematics at Universiti Teknologi Mara in Shah Alam.

Thirty years ago, he took charge of a small-scale business that sold seashells to feed mills and transformed it into what QL Resources is today: a leading resource-based agriculture company with three main business segments in marine product manufacturing (MPM), palm oil and integrated livestock farming (ILF).

When QL Resources first listed on Bursa Malaysia in 2000, it had a market capitalisation of only RM100 million, but this has grown to RM2.6 billion with revenue of RM1.94 billion and net profit of RM139.17 million for the financial year ended March 31 (FY12).

“Global economic conditions have not been favourable. Even China has been slowing down. But we have managed to grow by double digits in the first quarter,” Chia told a recent press conference. The group’s net profit for the quarter ended June 30 (1QFY13), grew by 10.8% to RM33.08 million.

It didn’t come as a surprise that QL Resources bagged The Edge BRC Company of the Year award in 2011.

The group draws from its background in deep sea fishing and is now the largest producer in Asia of surimi-based (fish meal) products, and fish and poultry feed. However, the group’s largest source of revenue and profit is now its ILF business, which generated almost 60% of revenue and more than half of its profit before tax (PBT) for FY12.

Through its poultry operations under the ILF arm, the group supplies roughly 15% of the eggs consumed in Malaysia.

This year, QL Resources celebrates its 25th anniversary. The group has taken a more regional focus, and one of its strengths is its ability to replicate its core businesses regionally.

QL Resources is expanding its MPM capacity with a plant in Surabaya, Indonesia, that will see it double its surimi  capacity to 10,000 tonnes per year by September next year and fishmeal to 10,000 tonnes per year by March 2013. The new capacity will be exported to the group’s existing customers.

QL Resources is also expanding its ILF business in Cianjur, Indonesia. Cianjur lies between Bandung and Jakarta, where QL Resources’ poultry farm will increase capacity from the existing 400,000 eggs per day to 900,000 by end-2013.

The group also plans to increase its day-old chick production at the plant from 1.3 million a month to 2.5 million.

The group has set aside RM200 million in annual capital expenditure (capex) from 2013 to 2014 with 60% borrowed and the rest from internally generated funds.

Interestingly, most of the group’s capex will go towards palm oil activities, which contributed 8.5% to operating profit in FY12.

For 1QFY13, palm oil activities contributed RM73.82 million to revenue and RM3.4 million to PBT. That works out to a 14.9% and 8.2% contribution to the group’s revenue and PBT respectively.

However, of the RM200 million in capex, the group plans to spend about RM70 million on palm oil activities compared with RM25 million to be used for MPM and RM60 million for ILF.

Most of the capex on palm oil activities will go into planting 2,000ha to 2,500ha per year of the group’s total 15,000ha of plantation land in East Kalimantan over the next few years, notes a RHB Research report.

Only 9,500ha of the land in Kalimantan has been planted, of which 4,000ha is matured. The group also has 3,000ha of matured oil palm plantation land in Sabah.

The Indonesian land is held via a 75% controlled joint venture with a local partner. Palm oil-related assets currently make up slightly over 22% of the group’s total assets.

Despite the stronger emphasis on expanding its palm oil arm, the division’s sales fell by 36% in 1Q compared with the previous year, leading to the palm oil segment’s contribution falling by half in the same period.

The group blamed the poor performance of the palm oil division on less fresh fruit bunch (FFB) processed as well as lower crude palm oil (CPO) prices, seasonal problems that have been plaguing the larger planters as well.

The group’s core segment, ILF, continues to perform, unperturbed by global financial crises and irregular weather patterns.

The group’s egg farming business underscores its defensive strength. While many other egg farmers have been making losses, QL Resources has managed to increase profitability.

The egg farming industry has been hit by a double whammy of low prices and rising feed costs due to the drought in the US which has devastated corn and soya bean crops.

Huat Lai Resources Bhd, the country’s largest egg producer, made a loss before tax of RM2.7 million in the quarter ended June 30, down from a net profit of RM11.9 million the previous year.

In comparison, QL Resources managed to increase its ILF division’s PBT by 23.4% to RM21.1 million in the same period. Chia said a combination of the group’s diverse operations and hedging strategies have taken the sting out of rising feed costs.

A report by Maybank IB Research noted that the group’s fishing business should also be relatively insulated from the El Nino weather phenomenon which caused global capture to fall by 8% y-o-y in 1998. El Nino causes ocean surface temperatures to rise, resulting in a migration of fish species that live near the surface.

However, a report by Maybank IB Research noted that the kerisi fish became abundant in Malaysian waters during the El Nino period in 1998 with kerisi catch rising almost 33%.
In the past five years, the group’s full-year revenue ballooned 48% to RM 1.95 billion in FY12 while its earnings were up 63% to RM131.41 million in the same period.

As expected for a group of its size, QL Resources’ growth is beginning to slow due to its large base. Over the past five years, the group has been generating return on equity (ROE) of 28.2% per year, including dividend. In comparison, ROE has fallen to 17.32% per year over the past three years.

Barring unforeseen circumstances, Chia said he expects the group to grow by 10% to 15% for FY13. Double digit growth for a company of this size is still remarkable, especially in the current global economic climate.

This article first appeared  in The Edge Financial Daily, on Oct 2, 2012.