QL Resources vs. Lay Hong

The author published the analysis report here is for his own reference only. It is not an indication of the author's business interests for companies being analyzed. It is definitely not an investment advice, please see the full disclaimer located at the bottom of the blog post.

In this analysis, two agricultural based companies: QL Resources Berhad (hereafter called "QL") and Lay Hong Berhad (hereafter called "LAYHONG") put side-by-side for comparison. QL and LAYHONG was not a direct competitor as QL's principal activities including marine product manufacturing, integrated livestock farming and crude palm oil milling, where LAYHONG's principal activity is integrated livestock farming only. Also, QL is substantial shareholder of LAYHONG, 23.91% shareholdings at financial ended 31 March 2011.

Side-by-side Comparison

Capitalization
Measure by size, QL is about 30 times larger than LAYHONG.

Income Items
Important items under this section is per share earnings and dividend, LAYHONG is the all-time winner except Avg. Earned per share 2005-2007.

Balance Sheet Items
QL has stronger balance sheet, albeit LAYHONG book value per share was 2.77 over QL's 0.95.

Ratios
Given market price on 31 March 2011, LAYHONG has much lower valuation than QL, what make QL has such high valuation?

1. QL has better earning power than LAYHONG, as illustrated by Net income/sales: 7.01% over 3.49% and Earnings/book value per share 15.75% over 10.64%.
2. QL has more appropriate and lower gearing (using less financial leverages) than LAYHONG, as illustrated by Total liabilities/book value, 0.85 over 1.33 and Current assets/current liabilities 1.47 over 0.96.

However, LAYHONG has much better earning growth prospect than QL, 1264.1% over 465.26%. A question come to mind is: Is the earning growth of LAYHONG sustainable? I will discuss this aspect under Financial Summary section below.

Price Record
The long-term (2001-2011) price different of QL is about 10 times and LAYHONG is about 5 times, QL has better price growth prospect in long-term. The near-term (2010-2011) price different of QL is about 2 times and LAYHONG is about 3 times, LAYHONG has better price growth prospect and expect higher price volatility in near-term.

Financial Summary

QL's Financial Summary

LAYHONG's Financial Summary

By looking into detail of the financial summary of both companies, you should understood why investment community giving QL such a high valuation: It demonstrated consistence earning power and average return on equity around 20%.

It is right that LAYHONG has much better return in the past three years, but I have no clue about LAYHONG's ability to maintain it's grow momentum as it's business was sensitive to grain price such as corn and soya. A hike in price of grain will eat up LAYHONG's 3.5% profit margin.

Please take note that QL increase it's weighted average shares year on year, but the increment mostly via share-split and bonus issue where increment of weighted average shares of LAYHONG via private placement and options exercised of Executive Share Options Scheme (ESOS).

As conclusion, the ultimate winner of this comparison is QL.

How Much QL Worth?
Given the company CAGR of EPS is 15% (approximately 18.46% in the past 5 years) and Dividend Per Share is 12% in the next 10 years, the EPS of the company will be RM$0.317 in 2020 (included adjustment of 2 bad years in 10 which reduce 30% of group's net profit) and the forecast dividends received over the 10 years period totaling RM$0.52 (included adjustment of 2 bad years).

If the stock price of QL sell at 15 times earning in 2021, it is RM$4.76 and included total dividends received, it is RM$5.28 per share. Given annual 6% inflation rate in next 10 years, the discounted rate is 0.591898. So, RM$5.28 discounted to today price, it is RM$3.13 per share.

The discounted price is merely 6.28% higher comparing to today (18 November 2011) closing price RM$2.93. I don't think the stock is undervalued at the moment, what do you think?