• 1QFY18 earnings improved marginally (+0.2% yoy) due to combination of higher POA earnings and lower effective tax rate which were mostly offset by weaker earnings at MPM and ILF divisions.

• Against ours and consensus forecasts, 1QFY18 earnings were in-line at (20%) and (19%) respectively. We note that 1QFY18 is typically the weakest quarter due to seasonality factors.

• On qoq basis, earnings improved but only due to lower effective tax rate as pretax profit came in weaker due to poor performance by POA and ILF divisions.

• Maintain Hold with TP of RM4.65 based on PE 25.4x applied to average FY18/19E EPS of 18.4sen.

Core earnings held up by lower effective tax rate

1QFY18 core earnings came in flat at RM42.2m (+0.2%) helped by lower effective tax rate of 12.1% (1Q17: 22%). Effective tax rate was lower due to reinvestment tax allowance for CAPEX at Hutan Melintang factory and deferred tax asset on profitable Indonesian palm oil operation. PBT fell to RM50.4m (-4.6%) due to the decline in MPM (-10.6%) and ILF (-19%) divisions which partially offset the strong performance of POA 158.6%. POA’s strong performance was due to higher FFB production especially in Indonesia and CPO price at RM2,746/MT (1QFY17: RM2,512).

QoQ PBT performance depressed by lower POA and ILF earnings

While earnings improved qoq, this was mainly due to the lower effective tax rate. At the pretax level, earnings fell 17% qoq on lower contribution from POA (-27%) due to lower CPO price vs (4QFY17: RM3,129/MT), and ILF (-51%) due to lower sales arising from higher competition, lower margins from domestic eggs operation and feed raw material trade. Nevertheless, the weaker earnings were mitigated by lower effective tax rate.

Stable outlook on production increases

Production increases in MPM and POA division are expected to provide stable medium to long term outlook for QL. We expect capacity expansion at its Hutan Melintang factory and higher acreage of maturing palm oil cultivation from its Indonesia estate to provide structural earnings growth.

Maintain Hold with TP of RM4.65

Maintain HOLD with a TP of RM4.65 based on PE 25.4x (1+SD above QL’s 3-years average PER of 22.7x) applied to average EPS FY18-FY19 of 18.4sen.

Source: BIMB Securities Research - 25 Aug 2017