QL’s 2QFY22 net profit fell by 34% YoY to RM45.9m, mainly due to lower fish landing cycle and spike in feed cost. Cumulative 1HFY22 net profit of RM88.1m were below expectations, accounting for 35% and 33% of our and consensus forecast respectively. The discrepancy in our forecast was mainly attributable to the higher-than-expected raw material costs. We are adjusting our FY22-24F earnings by 8-15%, mainly to factor in higher raw material costs and a higher effective tax rate following the withdrawal of tax exemption on foreign-sourced income. Following our earnings adjustment, our DCF derived TP is adjusted to RM5.30 (previously RM5.70). As QL’s share price has fallen by c.24% YTD and is at -1 SD of its 3-year historical average, (see figure 1), we think that the stock is trading at an attractive valuation. We are expecting QL’s earnings to improve going forward following the reopening of economic activities which should translate to an improvement in livestock ASPs and better footfall for its Family Mart operations. All told, we upgrade our call on QL to Outperform.

• 2QFY22 revenue grew by 16.3% YoY to RM1.25bn. The better performance was mainly due to the growth in Palm Oil and Clean Energy (POCE) segment (+122% YoY), following the consolidation of Boilermech’s sales and the higher CPO selling price. The ILF segment’s sales increased by 22.4% YoY, mainly driven by higher feed raw material trading price as well as the improved egg price and volume. However, sales growth was partially offset by the decline in MPM (- 15.7% YoY) segment, dragged by low fish landing cycle and disruption in fishing activities during the lockdown period.

• 2QFY22 net profit declined by 34.5% YoY to RM42.2m, mainly dragged by the spike in feed cost and the slower recovery in egg ASP, resulting in the ILF segment PBT falling by 74.2% YoY. In addition, the MPM segment’s PBT fell by 27.8% YoY, mainly attributable to the lower economies of scale given the lower production volume. The POCE segment saw a turnaround in earnings thanks to stronger contribution from plantation and Boilermech.

• Cukai Makmur. We think that the one-off Cukai Makmur is unlikely to have an impact on QL’s earnings as we understand that at the company level, none of its subsidiaries’ earnings exceeded the RM100m threshold.

• Outlook. We are expecting a recovery in Family Mart’s sales as footfall normalizes following an easing in movement restrictions. QL is on track to achieve its target of 300 stores by FY22, having opened 267 Family Mart stores to date. While raw material prices remain elevated, we are expecting margins to recover going forward. This is mainly premised on a recovery in egg prices in Peninsular Malaysia and Indonesia given the recovery in consumption especially from the Hotels, Restaurants and Cafes (Horeca) segment.

Source: PublicInvest Research - 30 Nov 2021