PP 7767/09/2011(028730)

06 October 2010
RHB Research
Corporate Highlights
Malaysia
Institute Sdn Bhd
A member of the
RHB Banking Group
Company No: 233327 -M

B r ief ing N ot e
6 October 2010
MARKET DATELINE

QL Resources Share Price

Fair Value
:
:
RM4.75
RM5.41
Exciting Prospects For Palm Oil Division Recom : Outperform
(Maintained)

Table 1 : Investment Statistics (QL; Code: 7084) Bloomberg: QLG MK

Net Net
FYE Turnover profit EPS Growth PER C.EPS* P/NTA Gearing ROE GDY
Mar (RMm) (RMm) (sen) (%) (x) (sen) (x) (%) (%) (%)
2010a 1,476.7 106.4 26.9 19.2 15.1 - 3.4 0.2 24.2 2.5
2011f 1,671.7 124.1 31.4 16.6 15.1 31.0 3.3 0.4 23.5 2.2
2012f 1,825.2 137.1 34.7 10.5 13.7 38.0 2.7 0.2 21.6 2.4
2013f 1,965.9 162.3 41.1 18.4 11.6 42.0 2.3 0.1 21.4 3.0
Main Market Listing / Trustee Stock / Syariah Approved Stock By The SC * Consensus Based On IBES Estimates

♦ We attended an analysts briefing held by QL Resources management Issued Capital (m shares) 395.2
yesterday. QL’s core focus in the briefing was its palm oil division’s Market Cap (RMm) 1,600.5
prospects and how its recently announced acquisition of a 40.51% stake in Daily Trading Vol (m shs) 0.3
Boilermech would complement the division. 52wk Price Range (RM) 2.42-4.09
Major Shareholders: (%)
♦ Exciting prospects for palm oil division. For FY11-13, we estimate QL’s CBG Holdings Sdn Bhd 47.0
palm oil division to contribute approximately RM300-330m to revenues Farsathy Holdings 13.4
based on its current crop yield and milling capacity. However, we believe
that the division has further potential than just its upstream and milling
FYE Mar FY11 FY12 FY13
activities, i.e. downstream biomass renewable energy. EPS chg (%)
Var to Cons (%) 1.3 (8.7) (2.1)
♦ Palm oil and renewable energy. Out of 1 tonne of fresh fruit bunch
(FFB), only 25-30% is processed to become Crude Palm Oil, while the rest PE Band Chart
is mostly discharged as waste i.e. palm kernel shells, palm effluents etc,
which leaves a high amount of carbon footprint. However, the discharged
waste can actually be used for power generation through various processes PER = 15x
and for various applications. This is where QL’s new investment comes into PER = 12x
PER = 9x
the picture. PER = 6x

♦ Forecasts. We are leaving our forecast unchanged despite the potential

revenue boost from its palm oil pellets, biogas and boiler division, as we
prefer to wait for the pellet plant to be completed by the end of this year
Relative Performance To FBM KLCI
before inputing any contribution from the pellets.

♦ Risks. The risks include: 1) significant drop in demand; 2) significant QL Resources

increase in raw material prices; 3) significant change in CPO price trend;
4) foreign exchange risk; and 5) aggressive growth that may strain its
balance sheet.
FBM KLCI
♦ Investment case. We continue to like QL as it has consistently provided
stable growth for investors, driven by its two core divisions of livestock
farming and marine products. We also like its focus on growing its smaller
division, i.e. palm oil, through more downstream activities. Our fair value
remains unchanged at RM5.41 based on an PER target for FY11 of 16x.
Maintain Outperform.

Please read important disclosures at the end of this report. Hoe Lee Leng
(603) 92802641
hoe.lee.leng@rhb.com.my

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 06 October 2010

Briefing Note

We attended an analysts briefing held by QL Resources management yesterday. QL’s core focus in the briefing
was its palm oil division’s prospects and how its recently announced acquisition of a 40.51% stake in
Boilermech would complement the division.

♦ Exciting prospects for palm oil division. QL’s revenue and earnings have always been dominated by its
two major divisions, namely integrated livestock farming and (ILF) and marine products manufacturing (MPM).
However, we will be focusing on its palm oil division, which is relatively small as compared to the other two
divisions; although we believe it has exciting prospects. For FY03/10, QL’s palm oil division contributed
RM273m (18%) and RM8.1 (5.9%) in terms of revenues and PBT respectively. QL currently has two palm oil
plantations located in Tawau (1.2k Ha) and Kalimantan (20k Ha), and two mills in Tawau. QL is also in the
midst of constructing a third palm oil mill and this is expected to be completed by 2012. For FY11-13, we
estimate QL’s palm oil division to contribute approximately RM300-330m (16-18%) to revenues and RM20-
40m (10-15%) to PBT based on its current crop yield and milling capacity. However, we believe that this
division has further potential coming from the downstream business of biomass renewable energy.

♦ Palm oil and renewable energy. Figure 1 shows an overview of palm oil and its by-products. Out of 1 tonne
of fresh fruit bunch (FFB), only 25-30% is processed to become Crude Palm Oil, while the rest is mostly
discharged as waste i.e. palm kernel shells, palm effluents etc, which leaves a high amount of carbon
footprint. However, the discharged waste can actually be used for power generation through various processes
and for various applications. This is where QL’s new investment comes into the picture.

Figure 1. Palm based technology

Source: Company

♦ Palm pellets. QL recently announced that it has completed the pre-commercialisation stage of its palm
biomass pelletizing system. The commercialisation stage of the project would begin once its Empty Fruit
Branch (EFB) treatment and pelletizing plant in Tawau is completed, scheduled to be at end-2010. The plant
will be able to produce approximately 40k MT of palm oil pellets p.a., of which an 80% utililisation rate is
expected, based on QL’s palm oil FFB yields. Palm oil pellets are derived from EFB, which is a form of waste.
EFB can be used in power generation, although due to its bulky form, it is not easily transportable. However,
QL’s pelletizing plant will be able to convert the EFB into smaller, compact pellets with the same application,
i.e. power generation, specifically biomass power generation. We understand that palm oil pellets contain
approximately 80% of thermal coal’s energy profile thus making it a suitable substitute for the commodity.
Furthermore, we understand that the usage of palm oil pellets for energy generation would provide the user

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 06 October 2010

with carbon credits due to its environment-friendly traits. Assuming a utilisation rate of 70%, expected selling
price of US$80-90/MT (coal prices are currently at US$90-100 levels), and an exchange rate of RM3.10/US$,
we estimate that the palm pellets will contribute approximately RM7-8m towards QL’s topline. Note that we
are being conservative in terms of pellet prices as we understand that due to its clean energy nature, palm oil
pellets should trade in line or above coal, despite only having 80% of coal’s energy profile. We also expect the
margins to be better given potential cost savings in terms of energy as QL’s plant is integrated with a biogas
power generation plant.

♦ Biogas power generation. Palm effluent, another form of palm oil waste, is a component which contains
high amounts of pollutive chemicals and requires treatment. A biogas power plant utilises the effluents to
become energy and the energy can be used for internal purposes or channeled to a power grid through
agreements with the power companies. For QL, we understand that its biogas power generation plant will be
used mainly to power its palm oil mill and pelletising plant, saving on energy costs thus giving rise to wider
margins. Currently, out of the approximately 400 palm oil mills in Malaysia, less than 10% utilises biogas
power generation. In terms of the plant cost, a biogas plant costs approximately 25% more per megawatt as
compared to a coal powered plant. However, for QL, the higher cost is irrelevant given its input is the waste
from its palm oil FFB’s and would result in cost savings for its operations. Note that QL’s biogas power plant,
which is expected to be completed by early-2011, involved a capex of approximately RM13-14m.

♦ Boilermech and its boilers. To recap, QL announced a purchase of a 40.51% stake in Boilermech for
RM29.2m, to be satisfied by internally generated funds. Boilermech is involved in the manufacturing and
maintenance of biomass boilers, which not surprisingly, given the theme of this report, is used exclusively in
palm oil mills for steam and power generation. It is one of the leading boiler manufacturers in the country,
with market presence in various palm oil producing countries such as Myanmar and Thailand. It has installed
almost 100 biomass boilers in the palm oil industry across the globe. For FY04/10, Boilermech recorded a net
profit of RM12.3m on the back of RM98.8m revenue. In YTD Aug, it recorded net profit of RM4.5m on the back
of RM36.4m revenues. After the acquisition, QL will have board representation of two (out of five) and
Boilermech will have an associate status. We expect Boilermech to contribute approximately 1-2% to QL’s
FY03/11 net profit, based on its annualised numbers. However, we believe the main reason for the purchase is
for QL to leverage on Boilermech’s technical capabilities and customer segments given QL’s foray into the
biomass energy segment. Furthermore, management has also indicated that Boilermech could be a potential
listing vehicle in the future, thus unlocking value for QL. Although, we do not expect this to happen anytime
soon.

♦ Herein lies the endgame. Palm oil pellets, biogas power generation, biomass boilers. All of which have two
things in common, palm oil and power generation. Based on the above, it seems QL’s palm oil story is centred
around its commercialising of the pellets by recycling its palm oil wastes, powered by a biogas plant that is
powered by another type of waste, and Boilermech and its technical know how on boilers. However, the real
palm oil story is in the integration of all three to develop a new technology system for zero-waste renewable
energy. We understand that QL’s ultimate aim is to install its integrated technology for other palm oil millers.
As highlighted, there are approximately 400 palm oil mills in Malaysia alone, thus giving ample opportunity
especially given the current rise in awareness of the environment and renewable energy. We believe QL’s plant
in Tawau, which is the first green palm oil mill in the world, to be a prototype of sorts for it to gauge the
viability of the technology. However, given the long gestation period required for any type of new technology
to gain commercial acceptance, we do not expect significant earnings contribution from these investments to
come until 2013, the earliest.

Risks

♦ Risks to our view. The risks include: 1) significant drop in demand; 2) significant increase in raw material
prices; 3) significant change in CPO price trend; 4) foreign exchange risk; and 5) aggressive growth that may
strain its balance sheet.

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Forecasts and Assumptions

♦ Forecasts. We are leaving our forecast unchanged despite the potential revenue boost from its palm oil
pellets, biogas and boiler division, as we prefer to wait for the pellet plant to be completed by the end of this
year before inputing any contribution from the pellets.

Valuations and Recommendation

♦ Investment case. We continue to like QL as it has consistently provided stable growth for investors, driven
by its two core divisions of livestock farming and marine products. We also like its focus on growing its smaller
division, i.e. palm oil, through more downstream activities. Our fair value remains unchanged at RM5.41 based
on an PER target for FY11 of 16x. Maintain Outperform.

Table 2: Earnings Forecasts Table 3: Forecasts Assumptions

FYE Mar (RMm) FY10 FY11f FY12f FY13f FYE Mar FY11F FY12F FY13F

Turnover 1,476.7 1,671.7 1,825.2 1,965.9 Revenue growth (%)

Turnover growth (%) 5.6 13.2 9.2 7.7 Marine 13.8 17.2 9.6
Palm oil 5.6 11.2 21.6
Cost of Sales (1,193.2) (1,338.6) (1,454.8) (1,541.9) ILF 2.8 3.6 7.2
Gross Profit 283.5 333.1 370.5 424.1
EBIT margin (%)
EBITDA 230.5 276.2 313.6 363.9 Marine 15.8 15.7 15.8
EBITDA margin (%) 15.6 16.5 17.2 18.5 Palm oil 6.7 8.7 13.8
ILF 8.8 8.8 8.7
Depr&Amor 40.8 49.7 56.7 63.2 Source: RHBRI
Net Interest (13.1) (19.3) (24.7) (23.2)

Pretax Profit 136.2 158.2 176.1 214.8

Tax (21.5) (23.7) (26.4) (32.2)
Minorities (8.2) (10.4) (12.6) (20.3)
Net Profit 106.4 124.1 137.1 162.3
Source: Company data, RHBRI estimates*

IMPORTANT DISCLOSURES

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The recommendation framework for stocks and sectors are as follows : -

Stock Ratings

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Outperform = The stock return is expected to exceed the FBM KLCI benchmark by greater than five percentage points over the next 6-12 months.

Trading Buy = Short-term positive development on the stock that could lead to a re-rating in the share price and translate into an absolute return of 15% or more
over a period of three months, but fundamentals are not strong enough to warrant an Outperform call. It is generally for investors who are willing to take on
higher risks.

Market Perform = The stock return is expected to be in line with the FBM KLCI benchmark (+/- five percentage points) over the next 6-12 months.

Underperform = The stock return is expected to underperform the FBM KLCI benchmark by more than five percentage points over the next 6-12 months.

Industry/Sector Ratings

Overweight = Industry expected to outperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Neutral = Industry expected to perform in line with the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Underweight = Industry expected to underperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

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