Monday, July 9, 2012

Why I have not considered QL Resources

In Bursa, among the participants in the poultry sector, there are Huat Lai, Lay Hong, Farm's Best, Teo Seng, LTKM and maybe one or two more smaller ones - none of them are above RM200 million in market capitalization. Then there is QL Resources (more than RM2.6 billion market cap), which is quite a darling among investors who are investing into this sector. QL, in fact is doing great. Just look below.


QL is actually not just into poultry, as it calls itself a diversified resource and agricultural based group. Poultry contributes around 60% of its income, while marine products manufacturing (fishmeal, surimi) and oil palm feed milling contributes the rest. By looking below, it does have good numbers.

QL's last 6 years numbers
If it is doing great, then why did I avoid it? My mistake probably, as I was too careful or could I be?

Low Margin business
I have always thought of the poultry business as a low margin business, which is true. In fact, QL is among the few who only managed to address a low single digit net margin. Over the years, it manages to register almost 10% net margin. The others which concentrates on mainly poultry manages only 1% to 7% net margin.
The low margin together with high capital expenditure needed to build the business causes all these players to have quite high gearing, although they are still manageable.

Management
I am not a fan of the way the board is structured. 6 (out of 11) members of the family are directors. Why need so many members in the board?

Nature of industry
If you look at the above names in the industry, none of them is a dominant supplier to the industry. If I want to buy eggs in the supermart for example, I would have no preference. As a guide, there are QL, Nutriplus, LHH, TP, house brands etc. Which one do you prefer? I don't think many has the answer either, as you do not go your "mamak" and ask for roti telor "QL", do you?

If it is such, then how does one become more successful or dominant than the other. Costs and distribution.
When comes to costs though, there is one player which is way above the rest and it is not even a Malaysian company.

Charoen Pokphand (CP)
Have you heard of the Charoen Pokphand Group? (Google it) It is probably the world's largest animal feed manufacturer in the world. Just for comparison, last quarter alone, the CP Group registered a revenue of Baht 73.5 billion (equivalent to RM7.3 billion) while its Net Profit was RM1.2 billion. The group is a diversified agroindustrial and food business originating from Thailand. CP is what QL is eyeing in a much smaller scale based on what the direction it has gone into. But yet, CP is so big in the feedmill industry for chicken that it is possibly able to control supplies especially in the region. What you see in Robert Kuok in the edible oil business is what you see in CP in the animal feed business.

Hence, when there is a competitor so big which controls the upstream market, the room to compete for the poultry industry in Malaysia may be very dependent on CP, when feeds consists of 60% to 70% of total costs. They could be dictating the pricing of the feeds in the country, we do not know. (Much like rumours that tell us that Robert Kuok was able to control the costs of raw sugar to the extent that when he sold out MSM, the new buyer (Felda) was having trouble to make its margins - hence we see sugar prices increasing)

I do not see CP doing this to the local poultry players but since CP is in almost the entire vertical, it is bound to dominate. The size of CP may also have caused these local players to only able to supply their produces locally, hence the growth may also be hindered by local demand growth.

Frankly, I do not have any idea of CP's size in Malaysia, but I reckon it is quite a big competitor judging from the supplies in the market.


Hence, my apprehensiveness in assessing the market growth potential and its competitor to the business has put a stop into me putting my money into QL, and I may be wrong. Anyway, now if you are looking at QL's smaller competitors, they are much cheaper valuation wise.

9 comments:

Anonymous said...

How about uncle kuok wilmar, best buy than ql?

Anonymous said...

Wilmar facing uphill task in keeping his refining margin!

felicity said...

In my opinion, WIlmar has gone very big very fast. In doing that, they are probably sacrificing margin for market share. I do see Wilmar in good light over longer term. Also, the tight margin could also be based on it is also a very large refiner. Refining margin for commodity item is more by MT rather than $. Last few years, prices of commodities has gone much higher, hence based on its net profit margin, we will see it tightening. However, if you are looking at agro resource company, Wilmar is the one.

Anonymous said...

Hi Felicty,your calls and investments advice are pretty accurate so far, however, are u licensed to give investment advice?

isnt it illegal to provide investment advice without a license by the securities commission?

felicity said...

Thanks for your comment. Do not think of it as an advice. It is my personal opinion. Also, I should not be blamed if any investment goes awry. Me blogging is the same as anyone who goes on any forum be it lowyat.net or somewhere else and asking others to buy this stock and that stock.
You will notice that I do put up some of my investments portfolio for others to view. That is to show that by doing it ourselves, there is a chance we can beat the market. That's it. I do NOT recommend any to follow my trait. IN fact, in most of my articles, I ask the reader to be comfortable with what your own call is.

Cheers

Benson said...

Hi Felicity, mind to ask ur opinion about TDM, this stock seem nt bad fundamentally with good dividend & growth, got exposure to healthcare sector somemore. Thx alot.

felicity said...

Hi Benson,

Looks good but have to study further. Palm oil stocks now are now facing some issues though.

Benson said...

Thx for reply Felicity. Ya,this company seems nt bad fundamentally, bcz this is state owened,just scare got internal issues tht i unable to understand. Rather weird bcz valuation of investor for this stock is low compare to state owned oil palm compnay like SOP, thinking n thinking but cant find the answer. I like this stock bcz got health care exposure.

felicity said...

Hi Benson

The healthcare portion is very small. It may not have much value creation to the group. The low price is probably due the state Terengganu compared to Johor which is much more willing to take risk. Terengganu is much more low lying as they are probably rich anyway.