Results

• In line – 9MFY18 core net income of RM159.9m (YoY: +7.5%) accounted for 77.1% and 73.9% of ours and consensus full year expectations respectively, inline with expectations. Note that 4Q is usually a seasonally weak quarter.

Deviations

• None.

Dividend

• None.

Highlights

• QoQ: 3QFY18 core net profit dipped 3.3% to RM57.9m on the back of lower margins in the group’s raw material trade business under the Integrated Livestock Farming (ILF) division and higher tax rate. This was in spite of better contributions from Marine Products Manufacturing (MPM) division due to seasonality of earnings, as well as the Palm Oil Activities division (POA) from increased FFB production.

• YoY: 3QFY18 core net profit rose by 3.2% to RM57.9m from RM56.0m due to better contribution from Indonesian and East Malaysia poultry farms (ILF division) in spite of lower MPM contribution as dry weather from post El-Nino led to lower fish catches.

• YTD: 9MFY18 core net income of RM159.9m increased by 7.5% due to better performance from the ILF (higher contributions from Indonesia and East Malaysia poultry operations) and POA divisions (better FFB production from the Indonesian plantation due to increased mature hectarage). This was in spite of the MPM division’s profit before tax dipping 14.8% as a result of lower fish landings due to dry weather.

• Family Mart: QL’s venture into the convenience store business is on track. To date, the group has opened 37 outlets, with plans to aggressively expand to 1,000 outlets by 2025 (source: Nikkei Asian Review).

• Prospects: We are neutral on the group’s prospects going forward. Cash handouts announced in Budget 2018 should see domestic consumption grow in 2018, which should benefit QL’s ILF division. Family Mart, while still in its infancy has been warmly received by the Malaysian public thus far.

Risks

• Poorer than expected fish landings, lower than expected egg selling price, lower than expected FFB production, persistent weak consumer sentiment.

Forecasts

• We raise our FY19/20 forecasts by 4.1%/4.5% to account for higher POA contribution from increased hectarage turning mature.

Rating

• HOLD ( ) TP: RM4.70

• We reckon that QL is a well run company with strong fundamentals, robust growth track record and diversified revenue streams. We are positive on the group’s foray into the convenience store business with Family Mart, however we expect the venture to take a number of years to turn profitable.

Valuation

• We raise our P/e multiple from 23.5x to 35x, in line with QL’s regional peers (see Figure 4). Post earnings adjustment and PE revision, our TP is raised to RM4.70 from RM3.09. Our call is raised from a sell to a HOLD.

Source: Hong Leong Investment Bank Research - 27 Feb 2018