• 1HFY18 earnings of RM102m were inline with our and consensus expectation making up 48% and 47% respectively.

• Earning increased (+10% yoy) due to combination of higher earnings from Palm Oil Activities (POA) +83.7% and Integrated Livestock Farming (ILF) +10.3% segments as well as lower effective tax rate.

• On qoq basis, earnings improved due to seasonal factor on Marine Product Manufacturing (MPM) segment and higher contribution from both domestic and oversea poultry unit in ILF segment.

• Maintain Hold with new TP of RM3.95 as we roll over our valuation year to FY19 based on PE 26x.

Earnings held up by lower effective tax rate

1HFY18 net earnings increased by 10% to RM102m helped by a lower effective tax rate of only 12.4% (vs 1H17: 21.3%). Effective tax rate was lower due to reinvestment tax allowance for capex at Hutan Melintang factory. PBT level declined slightly by 1.5% largely due to the decline in MPM segment by 15% as a result of post El-Nino low fish cycle in Malaysia water especially in Kota Kinabalu unit. However, this was mitigated by i) increase in POA segment (+84%) on higher FFB production especially in Indonesia as well as better CPO prices at RM2,650/MT (+5.7% yoy) and ii) improve ILF segment (+19%) due to higher sales from Indonesia and East Malaysia poultry units as well as increased volume of feed raw material traded.

Better qoq performance

On qoq basis, earnings improved by 41% to RM59.8m due to contribution from both MPM (+1%) and ILF (+193%) segment. MPM segment increased marginally due to seasonal effect. ILF segment recorded strong performance due to greater contribution from domestic and overseas (Vietnam & Indonesia) poultry units which commands higher margins (+4.3ppt qoq).

Stable outlook on production increases

Historically, 2H has always been the group’s better half and we expect this to continue on the back of higher FFB processed and better fish catch due to increase in its marine deep-sea fishing fleet. Structural earnings growth is expected to be seen from the capacity expansion at its Hutan Melintang factory and higher acreage of maturing palm oil cultivation from its Indonesia estates.

Maintain Hold with TP of RM4.65

We have a new target prices of RM3.95 (previously RM3.58) as we roll over our valuation base year to FY19 on PE 26x (QL’s 3-years average PER). Maintain HOLD as we believe most of the positives have already been priced in.

Source: BIMB Securities Research - 28 Nov 2017