KUALA LUMPUR (Jan 26): QL Resources Bhd’s (KL:QL) recent share price rebound is not sustainable, prompting a downgrade on the stock by MBSB Research.  

"We maintain our forecasts pending further guidance on capex (capital expenditure) structure and capacity expansion timeframe. 

"However, following a recent share price rebound, we revise our call to 'neutral' from 'buy' with an unchanged TP (target price) of RM4.33, based on our 10-year multi-stage DCF (discounted cash flow) model and WACC (weighted average cost of capital) of 7.2%," MBSB Research said in a note on Monday.

MBSB Research said this after QL unveiled QL Innofood Park, a long-term initiative involving RM1.3 billion in capital expenditure over 10 years, aimed at scaling up value-added and halal protein food manufacturing.

The project, spanning approximately 40.47 hectares in Hutan Melintang, will eventually house 13 production facilities and lift QL Foods Sdn Bhd’ annual production capacity to 180,000 tonnes, from 50,000 tonnes currently.

The initial phase of the development will focus on core infrastructure, with RM300 million in capex targeted for completion by 2H2027, while an additional RM100 million per year has been earmarked for the construction of individual production plants, allowing capacity to be added progressively.

“The project enhances QL’s long-term earnings optionality by broadening its protein offerings beyond surimi into soy-, poultry- and flour-based products, positioning the group to meet rising demand for diversified and sustainable protein in both domestic and export markets. However, these positives appear largely priced in at current valuations, prompting its downgrade to a 'neutral' stance,” said the house.

MBSB said earnings in the upcoming quarters should remain resilient, underpinned by stable feed costs and a gradual recovery in egg prices across Malaysia, Indonesia and Vietnam, which are expected to offset the impact from the removal of price controls.

"Branded egg sales continue to provide margin support within the integrated livestock farming (ILF) segment,” said the house.

Within QL Foods, contributions from surimi and aquaculture are expected to improve, while fishmeal profitability may recover progressively as selling prices firm amid tighter regional supply, despite ongoing input cost pressures.

The convenience store (CVS) segment could see better performance on the back of tourism-led footfall recovery and continued store expansion, partially offset by its exclusion from the Sumbangan Asas Rahmah (Sara) programme.

For its palm oil and clean energy businesses, the house expects palm oil earnings to benefit from improved fresh fruit bunch yields, while the clean energy segment should remain stable on existing project backlogs, despite slower new solar project wins following the discontinuation of the Net Energy Metering 3.0 (NEM 3.0) programme.

Therefore, the research house downgraded QL to 'neutral' from 'buy', while keeping its target price unchanged at RM4.33, citing valuation considerations rather than any deterioration in fundamentals. QL’s shares closed at RM4.03 last Friday (Jan 23), implying a potential upside of about 7.5%.