QL Resources (QL) 1QFY24 revenue jumped by 10% QoQ driven by contributions from all segments, with Marine Product Manufacturing (MPM) up by +18%, Palm Oil and Clean Energy (POCE) by +5%, Integrated Livestock Farming (ILF) by +6%, and Convenience Store Chain (CVS) by +17%. Consequently, PATAMI soared by 27% QoQ, with the margin improving to 5.8% (+0.8 ppts QoQ). Overall, PATAMI was in-line with our and consensus expectation, accounting for 25% and 24% of full year forecast respectively. We hold an optimistic outlook for QL's FY24, supported by higher productivity and stable margins, especially from the ILF and MPM segments. This could offset the potential near-term lower margin from the CVS segment. We maintain a BUY call on QL with an unchanged SOP-derived TP of RM6.30, implying a FY24F PER of 41x

• Within expectations. QL’s 1QFY24 net profit of RM92.8mn (QoQ: 27%, YoY: +13%) was in line with ours and consensus expectations accounting for 25% and 24% of full year forecast respectively.

• QoQ. QL’s 1QFY24 top line increased by 8% QoQ to RM1.6bn, thanks to higher revenue contributions from all segments. The higher MPM segment (+18% QoQ) was mainly due to better fishing landings from the new fishing season as well as benefited from higher fishmeal volume and prices due to Peru supply constraints. The ILF segment soared by 6% QoQ, due to higher selling prices for feed raw material trading, as well as an increase in farm produce in Indonesia and Vietnam operations. As for the CVS segment, revenue improved by 17% QoQ, thanks to the opening of 13 new stores and higher average store sales. Encouragingly, the bottom line jumped by +27% QoQ to RM92.8mn with a higher profit margin of 5.8% (+0.8 ppts QoQ), supported by improved operational efficiency mainly in the MPM and CVS segments.

• YoY. Revenue increased by 5% YoY driven by improvements in volume and selling prices for the MPM and POCE segments, as well as higher average store sales for the CVS segment. PBT experienced a significant 26% YoY increase, primarily due to improve margins in three segments: i) the MPM segment (+1.4 ppts), which benefited from higher export sales and overall production efficiency, ii) the ILF segment (+1.3 ppts), which saw increased production volume from Malaysia and Indonesia, along with operational efficiency in layer and broiler operations, and iii) the POCE segment (+9.7 ppts), which achieved substantial project margin recovery at Boilermech. Nevertheless, the PATAMI level only rose by 13% YoY, mainly curtailed by a higher effective tax rate resulting from nondeductible expenses.

• Outlook. We are optimistic about QL’s FY24 earnings prospects due to its defensive nature and diversified revenue base. Both of QL's key segments, ILF and MPM are projected to demonstrate higher productivity. This can be attributed to the recovery in Vietnam and Indonesia operations for the ILF segment and better fishing landings from the new fishing season as well as stable demand for surimi-based products for the MPM segment. Furthermore, we anticipate an improvement in the POCE segment as a result of increased Clean Energy (CE) project deliveries and margin recovery. However, the CVS segment could potentially experience some margin compression in the near term. This is due to elevated operating costs (especially labour) and the new central kitchen has not yet achieved economies of scale.

• Our call. We have a BUY call on QL with unchanged SOP-derived TP of RM6.30, which implies FY24F PER of 41x. We continue to like QL due to i) its strong brand name with stable earnings track record, ii) defensive nature of its businesses, and iii) high compliance to Halal standards.

Source: BIMB Securities Research - 30 Aug 2023