9 things I learned from the 2019 QL Resources AGM

QL Resources Berhad is an integrated agro-based business in Malaysia. It has since gained more attention from investors and consumers due to the opening of its chain of FamilyMart convenience stores in 2016. However, FamilyMart is just a small portion of QL’s business – the company is also involved in marine products manufacturing, integrated livestock farming, and palm oil activities.

I attended the company’s most recent annual general meeting to find out more about its various business segments and the management’s plan for future growth. Here are nine things I learned from the QL Resources AGM:

1. Revenue increased 9.1% y-o-y from RM3.3 billion to RM3.6 billion in 2019. The hike is mainly due to a 17.2% growth in revenue achieved by the integrated livestock farming segment on the back of the expanding convenience store and regional poultry operations. The segment made up 63.8% of QL’s total revenue in 2019 while marine products manufacturing and palm oil activities contributed 27.8% and 8.4% respectively. Revenue from the marine products manufacturing segment grew 11.5% y-o-y due to recovery of fish catch, improved prawn aquaculture as well as the completion of new facilities and enhanced production output. The export business of this segment also benefited from a weaker Malaysian ringgit in 2019. Revenue from the palm oil segment decreased 21.7% y-o-y because of lower crude palm oil prices and lower volume of fresh fruit bunches processed by Indonesian operations.

Source: QL 2019 annual report

2. Profit before tax (PBT) improved 13.3% y-o-y from RM240.4 million to RM272.4 million in 2019. Although the integrated livestock farming segment was the biggest contributor in terms of revenue, it only contributed 35.1% of PBT in 2019. PBT margin of the segment was 7.5% against its average PBT margin of 6.2% over the past 10 years. In comparison, the marine products manufacturing segment made up 57.4% of QL’s 2019 PBT and has an average PBT margin of 16.0% over the past 10 years. Overall, QL’s PBT margin improved slightly from 7.4% to 7.5% in 2019.

Source: QL 2019 annual report

3. QL invested RM100 million in its Hutan Melintang factories to double its annual production capacity of chilled surimi-based products to 25,000 metric tonnes, and increase its annual production capacity of frozen products from 20,000 metric tonnes to 35,000 metric tonnes. The factories have been in operation since March 2018. In Surabaya, QL spent RM5 million to pilot a frozen surimi-based products production line in Q1 2020. The production line was completed in Q4 2019 and has an annual production capacity of 3,000 metric tonnes.

4. QL boasts a daily production rate of 5.7 million eggs and trades over one million metric tonnes of animal feed raw materials annually. Minority Shareholder Watch Group noted that revenue contribution from integrated livestock segment from other regions increased more than threefold y-o-y from RM28.1 million to RM94.9 million. The management explained that the company ramped up its export revenue to China, Japan, and Singapore at RM10 million, RM19 million, and RM38 million respectively in 2019. QL expects the trend to continue moving forward. In Peninsular Malaysia, eggs are oversupplied but the situation was offset by a dip in production as a result of poultry diseases. The weakening ringgit also increased the cost of U.S.-dollar-denominated feed purchasing. In Vietnam and Indonesia, QL aims to double its egg production in the next three to five years.

5. A director shared that palm oil production is weather dependent. A prolonged wet season or excessive rainfall will negatively affect yield and oil extraction rates (OER). Three months of high rainfall in Kalimantan caused the OER to drop to 19%, which subsequently rebounded to 22%. The palm oil segment faces headwinds as the European Commission excluded palm oil from being eligible for EU national renewable transport targets.

6. A shareholder pointed out that y-o-y growth in total assets was as high as growth in revenue in 2019. (Revenue and total assets both increased from RM3.3 billion to RM3.6 billion.) He gathered that a lot of capital is needed to grow future revenue, and QL would only achieve limited growth without additional capital injections. Managing director Chia Song Kooi acknowledged that QL is in capital-intensive industries which need to spend on land, property, plant, and equipment to grow. In an ideal situation, revenue can be scaled from very little investment in assets. FamilyMart is an expansion into a downstream business that is relatively less capital-intensive. The company believes the convenience store business will contribute more revenue to the group in the future. QL has set aside RM400 million in 2020 (2019: RM307 million) as capital expenditure to expand its chicken farms, marine products manufacturing, and number of FamilyMart convenience stores.

7. Chia sees growth in the marine products manufacturing downstream sector in North America and China. QL currently exports surimi-based products to North America, while China is the world’s biggest seafood market. Demand for frozen and cooked shrimp is growing in China given the popularity of hotpots. In Malaysia, oden is also sought after in FamilyMart stores. He expressed optimism about the company’s outlook in 2020 given its 21.7% and 15.8% growth in quarterly revenue and profit in the recent Q1 2020 results.

8. A shareholder requested that QL report its convenience store chain as a standalone segment for better visibility. Chia explained that revenue or net profit generated by the chain has yet to meet the 10% threshold for it to be reported separately in accordance with financial reporting standard’s. The management confirmed that the chain has already broken even. As at March 2019, QL has a total of 90 FamilyMart stores and is targeting to open 300 stores by March 2022.

9. A shareholder asked if the company would grow cocoa trees in the future. Chia shared that QL actually ventured from cocoa to oil palm plantations in Sabah previously when the price of cocoa plunged due to disease while palm oil prices were on the rise. In response to another shareholder’s question, Chia mentioned the company may look into the artificial (plant-based) protein segment in the future. However, QL will not shift direction completely as Chia believes there is still business potential for meat.

Liked our analysis of this AGM? Click here to view a complete list of AGMs we’ve attended »

Shak Chee Hoi

Chee Hoi is an investor and research analyst at The Fifth Person. He was previously involved in wildlife conservation work with a non-governmental organisation as well as sustainability consultancy work. He personally believes in impacting society and the environment for the greater good.

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