• QL’s 1HFY17 net profit of RM92.6m is slightly below our expectation, making up 41% of our full-year forecast.

• Main earnings contributor for 1H17 is still Marine Product Manufacturing (MPM) division, although its contribution fell 6.3% yoy due to lower surimi and surimi–based products margins.

• Integrated Livestock Farming (ILF) continued to show improvement in earnings of 16.8% due to higher contribution from both domestic and regional poultry operations.

• We tweaked our FY17 and FY18 earnings forecast with new target price of RM4.74 after rolling over to FY18 EPS. Maintain Hold. Performance dampened by lower earnings from MPM and POA. QL’s 1H17 PBT amounting to RM123.5m denote flat growth rate despite revenue increasing by 4% to RM1.4bn. This was due to lower PBT derived from both MPM and POA divisions which recorded a -6.3% and - 18.2% yoy respectively. However, ILF division showed an improvement with a growth of 16.8% YTD.

MPM continues to be the main earnings generator. MPM 1H17 revenue of RM434m increased 10.3% yoy due to higher export contribution of fishmeal, surimi, and surimi based products. However due to lower overall margins of the fisheries products, PBT came in at RM74.1m (-6.3%).

Lower FFB production reduces POA earnings. QL’s 1H17 revenue and earnings from POA division fell to RM157.4m (-5.9%) and RM5.6m (-18.2%) YTD respectively as a result of severe drop in FFB processed in East Malaysia and continued El-Nino effect despite higher CPO price (RM2,507/MT vs. RM2,041/MT). Additionally, earnings was also lower due to lower contribution from associate (Boilermach).

Improved contribution from ILF. ILF division continued its impressive contribution by registering a 16.8% increase in PBT to RM43.8m on the back of a 2.9% increase in revenue to RM807.8m. The improvement was mainly due to better farm-produced prices in Malaysia and Vietnam, as well as higher contribution from the Indonesia feedmill operation.

Mixed outlook in store. Uncertainties in both domestic and global economy are expected to exert pressures on QL top and bottom line in the near future. Surimi productions under MPM division largely depend on availability of fish to process. Therefore this division is greatly affected by the amount of fish landings.

However, a bright prospect is in the ILF division. The operations of both local and regional units (Vietnam and Indonesia) are generating greater revenue and earnings. In addition a newly completed broiler farm with 50,000 birds/month capacity located in Kota Kinabalu is expected to boost growth for LIF division.

Earnings tweaked. We have tweaked our FY17 and FY18 earnings forecast to RM210.6m (-6%) and RM232.9m (-2%) respectively. We based our assumptions on the uncertainties prevailing in the domestic and global market as well as taking into consideration the upward trend in raw materials used and the effect of monsoon season in 2H17. We have a new target price of RM4.75 based on PE of 25.4x (+1 SD above QL’s 3-years average PER of 22.7x) after rolling over to FY18 EPS. Maintain HOLD.

Source: BIMB Securities Research - 22 Nov 2016