08/10/2012 (The Star) - We had the privilege to visit QL's Palm Biomass Pellet Plant powered by its Biogas plant located in Tawau with Chia Lik Khai, who began exploring its viability from an economics and engineering perspective for the past three years.

An operating “research and development” project coupled with proper opportunities, could potentially be a substantial future contributor for QL to sweeten our “outperform” recommendation, if steady earnings are realised. Using the empty fruit bunches (EFB) from the crude palm oil (CPO) mill as the main raw material source, the group can produce up to 25,000 MT of palm pellet capacity.

Currently, the group's aim to create renewable energy from its waste has been achieved, but contributions to the bottom-line are yet to be expected, pending the patent of the proprietary technology, marketing breakthrough and government regulations.

QL, in its efforts to recycle their waste also invested some RM14mil to develop their Palm Oil Mill Effluent Biogas plant which currently produces about 1MW (50% of total capacity) of electricity with 300,000 tonnes of EFB. The energy powers the production of the palm pellet plant to reduce the amount of biomass used for the process and to effectively produce more pellets.

A timely opportunity for QL, as the strategy paper analyses logistics cost, an issue faced by QL to export to Peninsular Malaysia due to Sabah's logistics cost to be high at estimated RM200 per tonne.

Currently the palm pellet set up has received an 100% income tax exemption for 10 years. Palm pellet can be substituted for coal and fuel oil as a burning biofuel, as well as bio-based raw material for industrial processes. The reduction of carbon emissions for every tonne of coal substituted palm pellet biofuel can reduce more than 1 tonne of carbon dioxide emissions.

In addition, the real-time treatment of EFB in palm oil mills into every tonne of palm pellet biofuel also reduces QL's EFB landfill greenhouse gas emission by an average of 1 tonne of carbon dioxide-equivalent.

We continue to assume that QL will maintain its steady earnings growth based on our sum-of-parts valuation of its three current segments of Marine products manufacturing, integrated livestock farming and palm oil activities to meet our forecast financial year 2013 (FY13) earnings estimates supporting our target price of RM3.83.

We re-iterate our valuation for QL using sum-of-parts with FY13 net profit and forward industry price-to-earnings (PE) of the respective segments. Our FY13 PE estimate for QL of 15.5 times multiple we believe is justified based on QL's strong historical earnings and growth strategies to deserve this valuation.