QL’s 1HFY10 net profit was within estimates, coming in at 49.6% of our full year forecast. EBITDA margin improved from 8.5% to 9.5%, partly due to lower contribution from its palm oil activities (POA) but was offset by higher earnings from its integrated livestock farming (ILF). Lower raw material cost led to better margins from its ILF division. Nonetheless, we are maintaining QL’s earnings for FY10 and FY11 and keeping our TP at RM4.43. Maintain Buy recommendation.
Business potential. QL recently ventured into biomass and has developed and patented palm pelletizing technology which emits energy equivalent to that from wood pellet. We believe there is a potential for QL, especially in Europe, as there was already a shortage of 1m tonnes of wood pellet in 2006. As such, there is market potential for palm pellets to substitute wood pellets in Europe. Furthermore, palm pellet is cheaper to produce as it is converted from waste compared with wood pellet, which uses non-renewable sources and wood by-products such as bark, which has higher moisture content, which in turn affects the quality of wood pellet. However, we think the local market is still not ready for the technology given that the conventional mix of EFB, paddy husks and saw dust is still more economical and easily available locally.
