1QFY20 core PATAMI of RM50.6m (QoQ: +0.9% YoY: +15.3%) was in line with ours and consensus estimates, accounting for 20.6% and 20.4% of full year earnings respectively. We deem this in line as 1Q is a seasonally weak quarter, typically making up approximately 21% of full year earnings. Post annual report update, our FY20/21 earnings rise by 0.1%/2.4%. 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 15.2 sen) and SELL call remains unchanged.

In line. 1QFY20 core PATAMI of RM50.6m (QoQ: +0.9% YoY: +15.3%) was in line with ours and consensus estimates, accounting for 20.6% and 20.4% of full year earnings respectively. We deem this in line as 1Q is a seasonally weak quarter, typically making up approximately 21% of full year earnings.

Dividend. None Declared.

QoQ. The Marine Processing Manufacturing (MPM) division posted significantly higher PBT contribution of RM47.0m (+36.4%) due to seasonal effect of better fishmeal and surimi-based product sales. In the Integrated Livestock Farming (ILF) division, headline revenue was up 10.0% from better feed raw material volumes and average seling price in addition to higher FamilyMart sales contribution (QL report’s FamilyMart contribution under the ILF segment). However, ILF’s PBT declined 13.1% from lower contribution from domestic poultry operations. The Palm Oil Activities (POA) division saw a 90.1% decline in PBT mainly due to low crop season, lower CPO price (1Q20: RM1,964/mt vs. 4Q19: RM1,976/mt) and weaker contribution from associate company (Boilermech). Overall, higher contribution from the MPM division was offset by weaker ILF and POA performance, resulting in flattish core PATAMI (+0.9%).

YoY. Core PATAMI grew 15.3% in tandem with top line growth of 21.7%. Earnings growth was mainly driven by stronger MPM contribution (PBT: +52.4%) for similar reasons mentioned above. This was in spite of weaker ILF (lower margins from feed raw material trade and poorer regional poultry operations) and POA contributions (lower CPO price of RM1,964/mt vs 1Q19: RM2,364/mt).

Family Mart venture. QL currently have 123 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. 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. Post annual report update, our FY20/21 earnings rise by 0.1%/2.4%.

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 15.2 sen) and SELL call remains unchanged.

Source: Hong Leong Investment Bank Research - 29 Aug 2019