FY19 core PATAMI of RM223.6m was broadly in line with ours and consensus estimates, at 99.3% and 97.8% respectively. We expect QL to reduce their reliance on fish landings by increasing fish and prawn aquaculture farming activities. As earnings were in line, we maintain forecasts. Our TP of RM6.00 (based on 40x FY20 EPS of 15.1 sen) and SELL call remain unchanged.

In line. FY19 core PATAMI of RM223.6m was broadly in line with ours and consensus estimates, at 99.3% and 97.8% respectively.

Dividend. Proposed dividend of 4.5 sen was the only dividend in FY19. (4Q18: 4.5 sen, FY18: 4.5 sen)

QoQ. Core PATAMI declined 27.6% mainly due to seasonality (note that 3Q typically accounts for between 28-30% of full year earnings, while 4Q accounts for under 22%). Marine Product Manufacturing (MPM) and Integrated Livestock Farming (ILF) divisions recorded decline in PBT contributions of 39.0% and 41.4% (20.3% after adding back fair value losses) respectively due to seasonality. Palm Oil Activities (POA)’s PBT contribution grew 21.6% due to higher CPO price (4Q19: RM1,976/mt vs 3Q19: RM 1,916/mt), selling of previous quarters inventory and better OER.

YoY. Better contributions from the MPM and POA divisions were enough to offset poorer ILF performance, resulting in core PATAMI growth to RM50.1m (+28.8%). MPM’s PBT of RM31.6m (+45.0%) was due to better fish landings. In the POA division, higher contribution from associate company (Boilermech) and better OER more than compensated for lower CPO price of RM2,462/mt (4Q18: RM1,976/mt), resulting in PBT tripling. However, decrease in ILF’s profitability was due to lower contribution from feed raw material trade and Vietnam poultry unit.

YTD. Core PATAMI grew 8.4% to RM223.6m of the back of sales increase of 10.7%. The better profitability was mainly attributed to better MPM contribution, due to reasons mentioned in the YoY section above. Despite a larger area of oil palms maturing in FY19, significantly lower CPO price of RM2,114/mt (FY18: RM2,603/mt) resulted in the POA division showing flattish growth.

Family Mart venture. QL currently have 103 operational outlets, with plans to open 300 outlets by FY22. We are very positive on the group’s venture into the convenience store business as the profitability of stores has far exceeded our expectations due to (i) higher average ticket amount of over RM10 (vs less than RM6 for its rivals); (ii) higher average customer count; and (iii) skewed sales mix toward fresh food. We expect Family Mart to achieve economies of scale sooner-than-expected and break even by mid-FY20 with an estimated store count of 110. QL shared that the capex requirements for each store averages RM400k.

Outlook. We expect QL to reduce their reliance fish landings by increasing fish and prawn aquaculture farming activities (MPM division). Furthermore, QL intends to ramp up egg production capacity to capitalise on rising incomes in Indonesia and Vietnam.

Forecast. Unchanged

Maintain SELL. We like QL for its diversified revenue streams, seasoned management team and decent growth prospects. Despite this, we feel that share price has risen beyond justifiable levels. Our TP of RM6.00 (based on 40x PE (+1SD) tagged to FY20 EPS of 15.1 sen) and SELL call remains unchanged.

Source: Hong Leong Investment Bank Research - 31 May 2019