Results

• Below expectations - 6M17 net income of RM92.6m came in below expectations, accounting for 42% of both ours and consensus FY17 full-year forecasts.

Dividends

• None declared.

Deviations

• Poorer margins in the MPM division (lower fish landings) and higher minority interest (RM4.5m from RM0.5m)

Highlights

• Qoq: Net Income rose to RM50.5m from RM42.1m (20% qoq) mainly due to seasonality, but also higher contributions from the ILF division, which realized higher ASP for its farm produce.

• Yoy: Net Income was lower by 8.4% yoy due poorer fish landings which impacted the MPM division, and higher minority interest (RM4.5m from RM0.5m). Increase in minority interest is due to QL’s Indonesian plantation operations increasingly turning profitable.

• Marine Product Manufacturing (MPM): MPM’s 2Q17 revenue climbed 1.4% qoq and 5.6% yoy to RM218.5m due to higher exports of fishmeal, surimi and surimi-based products on the back of weaker ringgit in 2Q17. However, PBT declined 8.4% yoy to RM39.1m due to lower fish landings during the quarter.

• Integrated Livestock Farming (ILF): ILF’s 2Q17 revenue climbed 21.5% qoq and 9.1% yoy to RM443.1m. PBT soared 88.8% qoq and 17.1% yoy to RM28.6m. This was due to increased volume and margins of feed raw material traded and higher realized ASP of farm produce.

• Palm Oil Activities (POA): POA’s 2Q17 PBT improved 14.7% qoq to RM3.6m (-15.7% yoy) due to improved realised CPO price (RM2,507 vs RM2,041) and increase in FFB production in the Indonesian plantation unit.

• QL’s venture into the convenience store business is on track, with the recent opening of the first FamilyMart store in Wisma Lim Foo Yong, Kuala Lumpur. A second store is scheduled for opening in early December in Mid Valley City. The group is the exclusive master franchisee of FamilyMart convenience stores in Malaysia for the next 20 years, and plans to open 300 stores over the next 5 years.

Risks

• Occurrence of El-Nino will impact ILF productivity due to heat stress as well as reduce FFB output in POA business segment.

Forecasts

• Our forecasted FY17/18/19 net income is adjusted downwards slightly by 5.5%, 5% and 4.8% respectively.

Rating

HOLD ↔

• We like QL due to it’s defensive nature and stable earnings.

• The contribution from QL’s recently announced convenience store venture, while viewed as a positive move with various synergies to the group, is not factored into the valuation as it will take several years of gestation before turning profitable.

Valuation

• We maintain our HOLD call with a lower TP of RM4.35 from RM4.40 based on a PE(x) valuation of 23.5x FY18 earnings.

• While QL is a well run company with strong fundamentals, robust growth track record, and diversified revenue streams, we believe the stock is fairly priced at current levels.

Source: Hong Leong Investment Bank Research - 22 Nov 2016