QL (7084) - QL Resources - Ho Kok Mun 何国馼


 QL Resources (QL, 7084) announced its partnership with FamilyMart in April 2016. FamilyMart is the world's second largest convenience store chain after 7-Eleven. QL managed to get this exclusive franchise right in Malaysia for 20 years until year 2036.

⚑ As of August 2018, QL has opened 59 stores in Malaysia. QL targets to have 300 stores within 5 years (by end of March 2022), which is average 60 stores per year.

⚑ Based on estimation, QL has allocated about RM770k capital expenditure for each store. Means, it requires additional RM186 million for the rest of 241 stores within the next 3.5 years to expand its FamilyMart business.

⚑ Based on my observation, FamilyMart does not fall under the same league as 7-Eleven. It has more ready-to-eat food selection. Its product is priced at a premium price. MyNews (owned by Bison) is another player in the same industry. Look like this space may get crowded with stiffer competition ahead. Will be interesting to see how 7-Eleven, which has more than 2000 stores in Malaysia, will change.

With or without FamilyMart, QL is a company worth mentioning. I have been following this company since early 2000s:

⚑ It has 3 large divisions: integrated livestock farming, marine products manufacturing and palm oil division.

⚑ I noticed that QL earnings per share (EPS) growth rate has slowed down. Its average figure is less than 10% for the past 10 years. Convenience store business not its core business. I assume that QL management team is taking a calculated risk to diversify. It wants to turn it into a growth engine.

⚑ QL's Return Of Equity (ROE) used to be very high before 2010. Its figure has gone down since then. Still, for the past 10 years, its average ROE is close to 19% which is still very impressive.

⚑ However, due to nature of its main business in livestock farming, its net profit margin is less than 8%.

⚑ Its average dividend yield (DY) for the past 10 years is less than 2%. Not ideal for passive income hunter.

⚑ Its debt over equity ratio (D/E) is close to 0.80. Just on loan and borrowing alone, it has accumulated more than RM1 billion under its current and non-current liabilities. I mentioned earlier it requires additional RM186 million for its FamilyMart expansion. Unless its other businesses can bring in higher profit, its D/E figure will continue to be mediocre. In fact, compared to Bison which owns MyNews, QL may be handicapped without extra fund to support the expansion within 3.5 years. Please take note that Bison, which owns MyNews, raised about RM88 million via its IPO in 2016 and RM77 million via private placement in 2017. In other words, Bison may have upper hand when comes to allocation of CAPEX budget.

⚑ QL's PE is more than 48. For me, it is extremely high.

The reason I wrote this article is to remind my readers that just because you know a company, you buy product from it, and you like its product (especially FamilyMart Matcha or French Vanilla flavoured ice cream), it does not mean you should invest in that company stock without doing any due diligence. Yes, I mentioned in my book that when you do not know where to start, exploring from what you know best could be a good starting point. However, you must still look at the company financial figures and business model.

If I have time, I will write a dedicated article on all of QL businesses, instead of just focus on its FamilyMart business. Do not be distracted by just its FamilyMart business which has created hype among speculators who buy and sell during this volatile period. They are "buying the future". They pay for the future price.



From QL recent 2018 annual report and FY19 Q1 quarterly report, I did not see any disclosure of breakdown of revenue and net profit for its FamilyMart business. However, at this point, it is safe to assume that FamilyMart contribution, whether revenue or profit, is very small compared to the other 3 segments.

Therefore, you should instead assess QL core business, especially its integrated livestock farming (contributed 60% of revenue) and marine products manufacturing to assess whether to invest or not.

QL is run by a team of good managers. I gave credit to them for trying hard to look for another growth engine. Just remember that, as value investors, we must look for a good stock at undervalued price.

If not supported by strong set of figures, what goes up will go down and vice versa.

Ho Kok Mun
15 September 2018

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