• QL provides shelter as a consumer staple stock due to its track record of delivering earnings and growth.
• We are convinced that QL’s long-term prospect remains promising with positive factors driving key segmental growth on all front.
• We estimate QL’s earnings to grow steadily at a 3-year CAGR of 11% over FY19-FY22F as its major business areas, i.e. fisheries, poultry and convenience store, continue to expand.
• Upgrade to BUY with SOP-derived TP of RM8.10 and unchanged earnings forecast.

Demand outlook remains positive

We are optimistic over QL’s short-to-medium and long-term business prospects with earnings expected to grow steadily at 3-years CAGR of 11% between FY19-22F. We believe earnings growth momentum is set to continue albeit at a slower rate in the 1H2020 before it normalises in 2H 2020 based on our assumption that the Covid-19 outbreak subsides in the second half. The catalyst for this growth will be driven by 1) stable demand for marine products, 2) better margins from Integrated-life Farming (ILF) segment, and 3) expansion of Family-Mart business. We foresee that demand for marine products to continue to be good for both domestically and export, albeit the Covid-19 pandemic and the imposition of movement restriction or lockdown. As for Palm Oil Activities (POA) segment, improved palm products prices and increase estates maturity profile would support POA’s top and bottom line in FY20/FY21.

Continuous support from ILF segment

We remain assured that our long-held conviction on QL will continue to see management delivering solid growth on all three key segments including the thriving “Family Mart” business. The signing of franchise agreement with Family-Mart in April 2016 marked QL’s involvement into convenience stores chain with the aim of adding long-term earnings driver to the Group. YTD, QL has 185 stores in operations, exceeding the initial target of 170 stores by Mar2020 with a target of 300 stores by FY22. We expect Family-Mart to post its maiden earnings contribution to the Group during the current FY, with PBT estimated at RM22m, followed by RM30m/RM38m for FY21/22.

Upgrade to BUY with unchanged TP of RM8.10

QL’s share price has fallen by 14% YTD and now we see value emerging in the stock with an upside of 13% from current price. We recommend BUY with SOP-derived TP of RM8.10 and unchanged earnings forecast. We believe this is a fair valuation in view of its sustained earnings growth as well as its dominant position as the largest local halal food producer that caters to basic food market with relatively inelastic product demand.

Source: BIMB Securities Research - 27 Mar 2020