Results

• Below Expectations –3MFY18 core net income of RM42.2m (yoy: +0.2%, qoq: +19.1%) came in below expectations, accounting for approximately 20% of our and consensus forecasts.

Deviations

• Lower-than-expected egg selling price, fish catches and poorer margins from feed raw material in the ILF business segment.

Highlights

• Yoy: 1Q18 core net income was marginally higher by 0.2% to RM42.2m as better performance from the POA division offset poorer performance in the MPM and ILF segments.
• Qoq: 1Q18 core net income rose by 19.1% to RM42.2m from better performance from the MPM division which more than offset decline in PBT from the ILF and POA segments.
• Marine Product Manufacturing (MPM): Post El-Nino weather caused fish landings to be low which in turn drove up fish selling prices.
• Integrated Livestock Farming (ILF): Oversupply of eggs in the domestic market continues to put downward pressure on egg prices. Additionally, the arrival of another player in the feed raw material industry has caused the group to sacrifice margins for increased sales volume. These two factors contributed to ILF PBT margin decreasing by 1.4 and 2.3 percentage points.
• Palm Oil Activities (POA): FFB production continues to increase as a larger area of QL’s Indonesian plantation is turning mature. Yoy PBT growth of 159% from RM2.6m to RM6.8m was due to higher FFB production and higher realised CPO price (1Q18: RM2,746/ mt vs 1Q17: RM2,512/ mt).
• FamilyMart: QL’s venture into the convenience store business is on track. To-date, the group has opened 20 outlets, with plans to aggressively expand to 1,000 outlets by 2025 (source: Nikkei Asian Review).
• Prospects: We are negative on the group’s prospects going forward. The entry of a new player in the feed raw material industry could spark a price war between industry players. Chronic low egg prices plaguing the industry will cause margin pressure to the group’s ILF operations. However, a larger amount of QL’s Indonesian oil palm plantation is turning mature and should add to earnings going forward.

Risks

• Poorer than expected fish landings and lower egg ASP.

Forecasts

• Downgrade our FY18/19/20 forecasts by 3%/3%/3% to account for poorer margins in the ILF division from lower margins from feed raw material business and lower egg selling prices going forward.

Rating

SELL (↔) TP: RM4.02

• While we reckon that QL is a well run company with strong fundamentals, robust growth track record, and diversified revenue streams, we believe the share price has run ahead of fundamentals.

Valuation

• We downgrade our TP to RM4.02 from RM4.14 and maintain our SELL call based on PE multiple of 23.5x of FY19 earnings. We like QL as a defensive consumer staple with strong management track record, however we believe the company is currently trading above its fair value.

Source: Hong Leong Investment Bank Research - 25 Aug 2017