KUALA LUMPUR (Jan 16): Kenanga Investment Bank Bhd (Kenanga IB) is optimistic about QL Resources’s near-term prospects, expecting livestock farming and marine products to continue driving QL’s growth.

According to a note on Tuesday, Kenanga stated that QL’s livestock farming segment is likely to maintain momentum, supported by a government subsidy of 10 sen per egg and a price ceiling of 41 to 45 sen for grade A–C eggs.

The research house said the subsidy is expected to continue until the first half of 2024, with a potential review in the second half of the year due to anticipated stability in egg supply.

However, the impact of demand changes is expected to be minimal since eggs are a staple food item for the general public, it added.

Meanwhile, QL’s marine product division is set for growth in the third quarter of 2024 (3QFY2024), driven by higher fish landings due to El Nino and better performance of its surimi-based products which is facilitated by lower input costs, said the research house.

It stated that the expansion projects in Surabaya, Indonesia, and Johor are on schedule for completion in FY2024, which will significantly enhance the surimi-based production.

“The Indonesian facility will boost capacity by 25,000 tonnes and the Kulai, Johor plant by 7,000 tonnes, collectively raising QL's total capacity by 49% to 97,000 tonnes annually.

“However, this expanded capacity will be utilised incrementally, aligning with product demand. Based on our rough estimation, we expect these additional capacities could contribute additional RM22 million sales in FY2024 and RM79 million sales in FY2025," it added.

For QL’s plantation and clean energy segment, the research house expected it continuing to be driven by a higher contribution from its 52.57%-owned subsidiary, BM Greentech.

It is expected to continue focusing on higher-margin segments such as water treatment and solar energy, benefiting from various government energy initiatives.

On the other side, QL’s CVS, anchored by FamilyMart outlets, is anticipated for a slow expansion in FY2024, it stated. 

The number of new openings has scaled back from the initial target of 72 to just over 60, attributed to a decline in consumer sentiment, it added.

Even though QL has planned to expand the store count to the northern region which is expected to boost revenue, Kenanga IB viewed that the higher labour and energy costs may limit the segment’s performance in FY2024.

However, it still likes QL Resources for its consistent high export demand for its marine products, the high growth potential of its FamilyMart convenience store franchise, and its growing poultry business in Indonesia and Vietnam. 

Factoring in higher contributions from QL’s marine product division, the research house raised its net profit forecast for FY2024 by 0.5% and FY2025 by 1.8%. 

It also lowered the capital expenditure (capex) assumption forecast for FY2024 to RM265 million and FY2025 to RM275 million from RM320 million each previously.

With a lower capex assumption, it raised the discounted cash flow-derived target price to RM6.25 from RM5.95 previously and downgraded the call to “market perform” from "outperform", given the limited upside potential (less than 6%) after the recent run-up in its share price.

“Risk to our call include the inability to pass on cost inflation, rough and aggressive monsoon seasons, changes in fishing regulations, and MYR strengthening against the USD,” it added.

At the time of writing, QL Resources was traded down a sen or 0.17% to RM5.89 per share, translating into a market capitalisation of RM14.33 billion.