This article first appeared in The Edge Financial Daily on December 16, 2019 - December 22, 2019

KUALA LUMPUR: QL Resources Bhd’s share price rally has room to run further, so long as the group continues to deliver stable earnings growth, say analysts.

The poultry and marine product manufacturing group’s shares hit a record high of RM7.88 last Thursday, before pulling back to RM7.55 at the close of the week, with a market capitalisation of RM12.25 billion.

An analyst (Analyst A), who asked not to be named, said QL is regarded as a consumer staple that is resilient to recession, and any earnings disruption is minimal. At the same time, he noted that QL has demonstrated stable yearly earnings growth, and consequently investors see this as desirable and as a safe haven. “People are willing to pay a premium for stocks that provide earnings growth stability,” he said when contacted.

Asked if the current price rally is set to continue, Analyst A said as long as QL can deliver strong earnings growth, the market will continue to reward it with high valuations.

The current rally, he added, could be attributed to investor confidence in FamilyMart’s operations. QL is the master licensee for the FamilyMart line of convenience stores.

Analyst A said FamilyMart compliments the group’s marine products as such products are used as ingredients for ready-to-eat and other meals served in the stores.

A minor factor for the rise could be the recent increase in crude palm oil (CPO) prices, as the group also has a palm oil activity (POA) division which has operations in the upstream, midstream and downstream segments.

LeInves PLT chief investment officer William Ng said if there is more than a 10% growth in its top and bottom lines, QL’s price can rise further. However, given its current 50 times price-earnings ratio (PER) and average quarterly earnings per share of four sen in a quarter, the maximum it would likely go is RM8 per share, he said.

Another analyst (Analyst B) said QL’s valuation is one of the most expensive in the consumer sector, adding that investors were attracted to its earnings track record.

In a Dec 2 note, Maybank Investment Bank Bhd analyst Jade Tham said QL is trading significantly above the average consumer sector peer PER of 28 times. RHB Retail Research, meanwhile, said in a note last Wednesday that QL may climb further after breaching the RM7.50 threshold.

“A positive bias may emerge above the RM7.50 level, with an exit set below the RM7.35 threshold,” said the research house. A further upside would see immediate resistance at the RM8 mark, followed by the RM8.50 level.

Even at last Friday’s closing price, the stock is above Bloomberg’s 12-month consensus target price (TP) of RM6.95, and above 12 of the 13 analysts’ TPs. Only AffinHwang Capital Research has a higher TP of RM8.50. QL has one “buy”, seven “hold” and six “sell” calls.

Analysts A and B also noted that risks such as lower fish catch and lower demand for FamilyMart products could pose a threat to QL’s earnings.

Analyst A thinks that in the long term QL’s FamilyMart business will become a big earnings driver. As more of the country urbanises, there will be more demand for convenience stores, he said.

However, Analyst B noted that the group’s integrated livestock farming (ILF) and POA businesses are more sensitive to commodity prices.

For Ng, given that there is a shortage of pork following the African swine flu epidemic that has decimated Chinese pork, demand for chicken might increase because of higher pork prices and lower supply, thus benefitting QL’s ILF business.

For the second quarter ended Sept 30, 2019 (2QFY20), QL’s net profit grew 15.1% to RM69.68 million from RM60.52 million in the corresponding period last year, following higher sales from the marine products segment. Revenue rose 16.6% to RM1.07 billion from RM920.26 million.

For the first half of FY20 (1HFY20), net profit rose 15.2% to RM120.23 million from RM104.38 million, with revenue growing to RM2.07 billion from RM1.74 billion.

QL’s POA division only accounts for 1.3% of its earnings for 1HFY20 and 6% of its top line for the period. The bulk of QL’s earnings come from its marine products segment.

In a Dec 2 note, AffinHwang Capital Research’s Lester Siew and Chow Wei Nien said QL’s POA division is expected to deliver a strong earnings contribution in 2HFY20 as CPO prices rise.

Meanwhile, the ILF segment should record a sequential margin improvement following the reduction in volatility of raw feed material prices and its regional poultry operations registering a higher earnings contribution.

“As such, we continue to foresee a seasonally stronger 2HFY20, with the MPM (marine product manufacturing) segment still benefitting from ample fish catch and expanded production capacity,” the research team noted.

Tham said in her report that Maybank raised its FY20, FY21 and FY22 net profit estimates by 11%, 9% and 11% respectively while projecting an 18% earnings growth in FY20 on account of an expected growth in MPM contribution from resilient export sales.

“Nevertheless, the strong FY20E is priced in, in our view, as we anticipate moderate earnings growth in FY21 to FY22 estimate (+6% to +7%),” said Tham, who maintained her “sell” call and RM6.60 TP on QL.