• QL Resources’ 9MFY19 core net profit of RM174m were below our estimate at 70% but in-line with consensus at 75%.

• Its 9MFY19 earnings increased 11% yoy, due to stronger performance in MPM and ILF divisions.

• On qoq basis, profit before tax rose 39% to RM93m owing to better performance by all divisions.

• We recommend Hold on the stock with a new SOP-derived target price of RM7.15 (previous recommendation was classified as “under review”).

Profit increased due to better product margins

QL’s 9MFY19 saw an improvement but slightly disappoint against our expectation, coming in at 70% of our forecast. Its core net profit increased by 11% yoy to RM174m (9MFY18:RM156m) boosted by better sales, and accompanied by higher margins and lower operating costs. Growth at PBT level increased at +9% yoy to RM211m largely due to the rise in MPM segment by +19%, as a result of higher contributions from surimi-based products and prawn aquaculture.

Improved sales performance by ILF and MPM segments

ILF’s revenue increased to RM629m (+21% yoy, +10% qoq). This is mainly due to higher sales contribution from feed raw material trade. We estimate that “Family Mart” (FM) stores have also contributed significantly to the increase in ILF segment revenue with 83 stores in operations to date. MPM revenue was recorded at RM279m (+5% qoq & yoy), due to seasonal factor and higher contributions from surimibased products.

Higher qoq profit performance

On qoq basis, PBT improved by 39% to RM93m. It was contributed by MPM (+32%), experiencing a seasonal effect with improved aquaculture performance, combined with ILF (+10%) due to higher margins from feed raw material trade and the increase in number of FM stores by 12 stores from 71 stores at the end of 2QFY19. Its POA division also posed better performance attributed to better CPO milling margins.

Hold at higher TP of RM7.15 (from RM4.70)

We recommend Hold on QL with a new SOP-derived TP of RM7.15. The stock had been classified as “under review” previously. We have relooked at QL’s business, primarily the contribution of FM franchise to the overall impact of revenue and profit. We revised FY19 and FY20 forecast by 13% and 14% respectively as we assume higher opex. Overall, we estimate QL’s net profit to show a steady growth over the next 3 financial years. Key risk, in our view, is its ability to incorporate higher operation costs in managing the downstream franchise.

Source: BIMB Securities Research - 1 Mar 2019