QL’s 3QFY23 core net profit jumped by 62.5% YoY to RM97.2m, mainly driven by the stronger contribution from the Integrated Livestock Farming (ILF) segment. Cumulative 9MFY23 core net profit was above our and consensus estimates, accounting for 84% of full-year forecasts. The discrepancy in our forecast was mainly due to the stronger-than-expected margins from the ILF segment. We revise our forecast for FY23-25F upwards by 4-6%, as we raise our profit margins assumption for ILF segment. Consequently, our DCF derived TP is revised to RM6.20 (previously RM6.05). We maintain our Neutral call on QL as we think that its current valuations remain lofty at c.40x forward PE.

• 3QFY23 revenue grew by 16.3% YoY to RM1.63bn. This was due to stronger contributions from all other operations except for the Palm Oil and Clean Energy (POCE) (-28.4% YoY). Marine Product Manufacturing (MPM) sales improved by 9.7% YoY on higher ASPs and selling volume except for surimi-based products. Meanwhile the ILF segment’s sales increased by 29.8% YoY, thanks to the higher feed raw material trading volume and selling price as well as farm produce price. The Convenience Store Chain (CVS) chalked in a 22.7% YoY growth, driven by the additional 75 new stores.

• 3QFY23 core net profit jumped 62.5% YoY to RM97.2m, mainly attributable to the improvement in ILF segment’s margins given the recovery in egg demand amidst tight supply in Vietnam and Malaysia. Additionally, the government subsidy also helped to cushion the higher input cost. Despite posting higher sales, the CVS segment’s earnings fell by 62.8% YoY, dragged by the increase in operating cost and lower average sales per store. POCE reported a Loss Before Tax of RM1.2m, on lower CPO price and FFB tonnage produced, as well as a margin compression in Boilermech due to the high input cost.

• Outlook. We expect QL to post weaker QoQ earnings in 4QFY23, mainly due to seasonality factors with the monsoon season thereby affecting fishing activities. While the group is on track to achieve its target of opening 70-80 new FM stores for FY23 (opened 61 as of 3QFY23), we remain concerned over its profit margins on lower average store sales given the weaker consumer spending and higher labour cost. Meanwhile, we think that the strong margins from ILF segment is not sustainable, on the back of lower demand for the trading of feed raw material and weaker egg prices in Vietnam. However, the government subsidy in Malaysia coupled with a recovery in egg demand in anticipation of the Ramadan festive should help to cushion the impact from the feed raw material trading arm and Vietnam’s operations.

Source: PublicInvest Research - 8 Jun 2023