Reported 6MFY19 core PATAMI of RM104.4m (YoY: +7.9%) was broadly in line with ours and consensus estimates, at 46.4% and 45.8% respectively. We are encouraged by QL’s foray into the convenience store business, as Family Mart seems to be well received by Malaysian consumers. Despite this, we expect the business segment to be loss making in the short term. We maintain our TP of RM5.10 (based on 35x PE of FY 19 EPS of 14.6 sen) and SELL call

In line. Reported 6MFY19 core PATAMI of RM104.4m (YoY: +7.9%) was broadly in line with ours and consensus estimates, at 46.4% and 45.8% respectively. We deem this in line as 2H is historically slightly stronger than 1H.

Dividend. None Declared (2QFY18: None).

QoQ: Core PATAMI grew 38.0% to RM60.5m due to better performance in the Marine Product Manufacturing (MPM) and Integrated Livestock Farming (ILF) business divisions. MPM division’s profitability was fuelled by recovering fish landings (+26.7% at the PBT level). ILF division grew strongly by 72.4% at the PBT level from higher contributions from Malaysia poultry units (partially from recovery in egg prices in 2Q19) and increased raw material trade volume. The better performance was achieved despite the Palm Oil Activities (POA) division posting losses for the first time since 4QFY15.

YoY: Core PATAMI growth of 10.7% was in tandem with higher revenue (+13.8%), which grew to RM920.3m, a record high for QL. Profitability was driven by better performance in the MPM division for similar reasons mentioned above as well as favourable effective tax rate. Despite this, the POA division posted RM1.6m losses in 2Q19 vs RM3.1m in 2Q18 at the PBT level. This was due to lower OER from Indonesia plantations and lower average realised CPO price (2Q19: RM2,198/mt vs 2Q18: RM2,650/mt).

YTD: 6M19 core PATAMI of RM104.4m was 7.9% higher as a result of better performance in MPM and ILF divisions for reasons mentioned under the QoQ section. However, we note that the POA division’s PBT shrunk from RM8.8m to RM1.2m (- 86.4%) which was from post El-Nino environment, that resulted in reduced FFB supply from external suppliers as well as own FFB production in Indonesian operations. Additionally, lower average CPO spot price contributed to poorer POA contributions (CPO average spot price in 6M19: RM2,304/mt vs 6M18: RM2,608/mt).

Family Mart: QL’s venture into the convenience store business is on track. To date, the group has opened 73 outlets, with plans to aggressively expand to 1,000 outlets by 2025.

Prospects: We are encouraged by QL’s foray into the convenience store business, as Family Mart seems to be well received by Malaysian consumers. Despite this, we expect the business segment to be loss making in the short term until Family Mart achieves economies of scale, which is imperative for convenience store businesses.

Forecast. Unchanged as the Results Were Inline.

Maintain SELL. We like QL for its diversified revenue streams and decent growth prospects. Despite this, we believe the share price has risen beyond justifiable levels with PE valuation in excess of 50x. Our unchanged TP of RM5.10 is pegged to 35x FY20 EPS of 14.6 sen.

Source: Hong Leong Investment Bank Research - 27 Nov 2018