Friday, June 24, 2011

QL- time to take profit

Background

QL Resources Bhd ('QL') is involved in 3 main businesses, i.e. marine products manufacturing, Crude Palm Oil milling and integrated livestock farming. In the recent quarters, QL's financial performance has been very much dependent on Crude Palm Oil milling and integrated livestock farming. For detail of the contribution of the 3 main business, see Table 1 below.


Table 1: QL's segmental report for 4Q2011 & FY2011

Recent Financial Performance

We can see that Integrated Livestock Farming division is the most important division in QL, as it contributes 57% of its turnover & 68% of its pre-tax profit. The pre-tax profit margin of this division has improved from 8.5% in QE31/3/2010 to 9.6% in QE31/3/2011. The Marine Product Manufacturing division is the second largest division, contributing 22% of turnover & 26% of pre-tax profit. The profit margin of this division dropped sharply from 14% to 9%. As a result of the sharp drop in profit margin of the Marine Product Manufacturing division, QL's overall pre-tax profit margin slid from 8.4% to 8.0%.


Chart 1: QL's profit margin for the past 21 quarters

For QE 31/3/2011, QL's net profit dropped by 4.8% q-o-q to RM31.6 million despite a 11.5%-increase in Turnover to RM503 million. When compared to the same quarter last year, QL's net profit was up 19% while turnover was up 22%.


Table 2: QL's last 8 quarterly result



Chart 2: QL's last 21 quarterly results

Recent Completed Corporate Exercise

In January this year, QL completed a private placement of 20.828 million shares at RM5.60 each. This was followed 1-to-2 Share Split as well as the issuance of free warrant of 1 warrant for every 20 shares owned, both were completed on February 8. As a result of these exercises, QL's outstanding shares increased from 395.173 million units to 832.002 million units today. We have noticed many times that a generous bonus issue or share split would lead to share overhang which would subsequently depress the performance of the share price for many months.

Valuation

QL(closed at RM3.24 yesterday) is now trading at a PE of 20.6 times (based on last 4 quarters' EPS of 15.71 sen). At this multiple, QL is considered overvalued.

Technical Outlook


QL broke its accelerated uptrend line (St-St) at RM3.25 in early June. Subsequent attempt to climb above the uptrend failed. QL's next support would be the horizontal & psychological level of RM3.00. If this support also failed, QL could slid to the long-term uptrend line (SS) where support is at RM2.50-2.60.


Chart 3: QL's weekly chart as at June 23, 2011 (Source: Quickcharts)



Chart 4: QL's monthly chart as at June 1, 2011_log (Source: Tradesignum)

Conclusion


QL is a very well-managed company and an excellent stock for long-term investment. I first recommended this stock to my client in 2003 (before I started this blog) & until today, my clients still ask occasionally whether I have another QL to recommend. Notwithstanding this sentiment, I believe QL is now a trading SELL given the poor technical outlook and trading at high PE multiple. It could be a good BUY again when/if it touches the RM2.50-2.60 level.

2 comments:

Anonymous said...

Hi Alex

Can you comment on two penny stocks: Keladi and CYL. Both have proposed good regular dividend with keladi (1.5sen) and CYL (4sen), giving rise to yield of 7-8%. In turn of balance sheet: keladi in net cash of 7.8sen/share, while CYL have no borrowing. What are their fair price?

Keladi (18sen)

1. Proposed 15% or 1.5sen dividend
2. Net cash with 7.8sen/share
CYL (57.5sen)

1. Proposed 4sen TE dividend\
2. No borrowing in balance sheet

Alex Lu said...

Hi hng

My take on your two penny stocks:
1) Keladi is a small Kedah-based property developer (with land bank about 480 acres) with a few small oil palm estates (less than 1300 acres). Its past 3 years' earning is about 2 sen. Thus, at RM0.185, it is trading at a PE of 9 times. That's full valuation. Chartwise, it is in an uptrend line, with support at RM0.18. Its next support is the horizontal line at RM0.165.

2) CYL is involved in plastic packaging. Its earning for the past two years is about 3.7 sen. Thus, at RM0.58, CYL is trading at a PE of 15.6 times. That's full valuation. Chartwise, it is trading within a symmetrical triangle, with support & resistance at RM0.50 & RM0.60.

Good dividend yield & cash reserves may explain why these stocks are trading at this high level. Can they go higher? We will have to wait & see.