QL’s 4QFY23 core net profit grew by 5.7% YoY to RM73.3m, mainly attributable to the stronger contribution from the Integrated Livestock Farming (ILF) and Palm Oil and Clean Energy (POCE) segment. Full-year FY23 core net profit of RM346.8m came in within our and consensus estimates, at 101% and 99% respectively. We are optimistic on QL’s outlook, as we expect better profit margins from its ILF segment on better cost pass through mechanism, after the lift in ceiling prices for poultry products and stronger contribution from its Convenience Store Chain (CVS) operations. We upgrade our call on QL from Neutral to Outperform with an unchanged DCF-derived TP of RM6.20, as we think that its current valuation is attractive, trading at -1SD of its 5-year average forward PE (see figure 1), following a recent retracement in its share price.

• 4QFY23 revenue grew by 7.4% YoY to RM1.47bn, as all operations reported stronger sales growth except the POCE segment (-6.3% YoY), dragged by weaker palm oil activities coupled with lower CPO price. Marine Product Manufacturing (MPM) sales rose by 6.4% YoY stronger sales for surimi-based products and seafood processing. This had helped to offset the weaker performance from a delay in fishing season. ILF segment saw its revenue increase by 6.8% YoY, driven by a recovery in selling volume and price for farm produce and feed raw material trading. CVS sales surged by 25% driven by the additional 76 new stores.

• 4QFY23 core net profit increased by 5.7% YoY to RM73.3m, mainly lifted by the stronger performance from ILF. This was mainly due to the stronger performance (layer and broiler) and greater efficiency whilst being supported by the government’s subsidy program. Despite recording lower revenue, POCE’s PBT more than doubled to RM14.4m due to a recovery in project margin from Boilermech. CVS saw its PBT margin fell by 5.2 ppts to 3.3%, mainly due to the higher labour cost and low production efficiency from its new central kitchen as it has yet to achieve economies of scale.

• Outlook. Although feed raw material cost remains volatile, we are expecting an improvement in ILF’s margins in FY24F. This is mainly premised on the government’s plan to lift the price control on poultry products after June 2023, which should enable a better cost pass through mechanism. As for the CVS segment, we are expecting a gradual improvement in its PBT margins as its new store opening plans (72 FM stores and 72 FM Minis in FY24F) should ramp up the production in its second central kitchen, thus achieving better economies of scale.

Source: PublicInvest Research - 31 May 2023