• QL Resources’ 1HFY19 core net profit of RM104.4m was below our and consensus estimates of 42% and 46% respectively.

• Its 1HFY19 earnings increased 7.9% yoy, due to stronger performance in MPM and ILF divisions.

• On qoq basis, profit before tax rose 31% to RM67m owing to better performance by POA (+27%) and ILF (+69%) divisions.

• No adjustment was made to our earnings however, as we are currently reviewing both our forecast and target price.

Profit increased due to lower effective tax rate

QL’s 1HFY19 core net profit increased by 7.9% yoy to RM104.4m (1HFY18:RM96.7m) caused by lower effective tax rate (-9% yoy). The lower tax rate was due to reinvestment in tax allowance for capex at Tuaran factory. Overall, core profit was slightly disappointing, as it made up 42% of our estimates and 46% of consensus’. Growth at PBT level remained flattish at +2% yoy to RM118.2m largely due to the decline in POA segment by -86.4%, as a result of decrease in FFB production and lower CPO price.

Improved sales performance by all segments

ILF’s revenue increased to RM920.3m (+13% yoy, +14% qoq). This is mainly due to higher sales contribution from feed raw material trade and Peninsular Malaysia’s poultry units. We estimate that Family Mart stores may have also contributed significantly to the increase in ILF segment revenue with 71 stores in operations to date. MPM revenue was recorded at RM266.8m (+23% qoq & yoy), due to recovery of fish catch cycle in Malaysia water and higher contributions from surimi based products. The POA division revenue of RM82.5m (+20% qoq, +6% yoy) is attributed to sale of unsold previous quarter CPO stock.

Higher qoq profit performance

On qoq basis, PBT improved by 31% to RM67m. It was contributed by MPM (+27%), experiencing a seasonal effect with improved aquaculture performance, combined with ILF (+69%) due to higher margins from feed raw material trade and the increase in number of Family Mart stores by 22 stores from 49 stores in 1QFY19. Its POA division however fell 158%, due to lower CPO prices (2QFY19: RM2,198; 1QFY19: RM2,364).

Maintain forecast pending review

Both our earnings and target price are under review as we relook at QL’s business, primarily the contribution of the Family Mart franchise to the overall impact of revenue and profit. Our recent meetings with QL indicate that the Family Mart business is running ahead of management’s initial assessment.

Source: BIMB Securities Research - 27 Nov 2018