Reported 1QFY19 core PATAMI of RM43.9m (QoQ: +25.8%, YoY: +4.4%) was in line with ours but below consensus. We expect the “zerorisation” of GST to boost QL’s poultry and Family Mart’s sales in 2QFY19. However, lower forecasted CPO price in CY18 will have an impact on QL’s POA division. Our forecasts and TP of RM5.10 are maintained. However, we downgrade our call from a HOLD to a SELL as we opine the share price has risen to unjustifiable level with PE valuation now in excess of 40x.

In line. Reported 1QFY19 core PATAMI of RM43.9m (QoQ: +25.8%, YoY: +4.4%) was in line with our estimates at 19.5%, but below consensus at just 18.2%. We deem this in line as 1Q is seasonally the weakest quarter.

Dividend. None Declared (1QFY18: None).

QoQ: Core net income rose by 25.8% to RM43.9m. This was mainly due to better contributions from (i) Marine Product Manufacturing (MPM) division due to seasonality and improved aquaculture performance; and (ii) Integrated Livestock Farming (ILF) as a result of higher sales volume in the raw material trade business. These were more than sufficient to compensate for poorer Palm Oil Activities (POA) performance. Weaker POA performance was due to lesser FFB production, decreased FFB supply from third party plantations, and lower average CPO price (4QFY18: RM2,426/MT vs 1QFY19: RM2,364/MT).

YoY: Slightly higher core net income of 4.4% was due to better contribution from the ILF division due to similar reasons mentioned above. Better ILF performance was partially offset by poorer POA contributions from lower average CPO price (1QFY18: RM2,746/MT vs 1QFY19: RM2,364/MT) and reduced FFB production.

Family Mart: QL’s venture into the convenience store business is on track. To date, the group has opened 59 outlets, with plans to aggressively expand to 1,000 outlets by 2025.

Prospects: We expect the “zerorisation” of GST from 1 June 2018 onwards to have a positive impact on consumer sentiment, boosting QL’s poultry and Family Mart’s sales. However, lower forecasted CPO price for CY18 of RM2,500/mt (vs RM2,705/mt in CY17) will have a negative impact on QL’s POA division.

Forecast. Unchanged.

Downgrade to SELL. Despite the absence of an earnings surprise, we downgrade our call from a HOLD to a SELL due to the recent rise in QL’s share price. We like QL for its diversified revenue streams and decent growth prospects. Despite this, we believe the share price has risen beyond unjustifiable levels with PE valuation in excess of 40x. Our unchanged TP of RM5.10 is pegged to 35x FY20 EPS of 14.6 sen.

Source: Hong Leong Investment Bank Research - 28 Aug 2018