QL reported FY21 core PATAMI of RM232.4m (-2.9% YoY) that was below our and consensus expectations at 87%/89%, respectively. Moving forward, we expect MPM to remain the main driver for earnings sustainability with its resilient sales of frozen food products. ILF on the other hand may face challenges with fluctuation of egg prices despite its venture s in Vietnam and Indonesia. We lower our forecast for FY21/22 by -4%/-5%. After earnings adjustments and rolling over our valuation year to FY23, our TP decreases from RM5.88 to RM5.81 based on an unchanged 50x PE. Maintain Hold.

Below expectations. 4QFY21 core PATAMI of RM35.1m (QoQ: -54.1%, YoY: - 18.5%) brought FY21 amount to RM232.4m (YoY: -2.9%), which was below our (87%) and consensus (89%) estimates. The deviation was on the back of lower operating profit contribution from the integrated livestock farming (ILF) segment. Core PATAMI was arrived after adjusting for one-off gain of RM79m arising from re-measurement of the group’s previously held equity interest in Boilermech (now consolidated).

Dividend. Declared final single tier dividend of 3.5sen/share subject to approval of shareholders at the forthcoming AGM. (FY20: 4.5sen/share)

QoQ. Revenue rose by 9.2% with improvements from palm oil and clean energy (POCE, +>100%) and ILF (+3.8%) which more than offset the decline in marine product manufacturing MPM (-4.7%). Improvement from POCE was due to consolidation of Boilermech’s sales. ILF’s better sales were thanks to higher unit selling price for raw material trading. However, ILF’s earnings decreased by -40% due to higher feed costs, poor egg prices and weaker broiler integration performance. Despite higher revenue, core PATAMI declined by -54.1% due to the drag in core EBIT margin by -3.8ppt.

YoY/YTD. Overall revenue increased by 23.6% YoY/ 5.2% YTD driven by higher sales across all divisions. Increased sales in the MPM division was due to higher sales for surimi based products, seafood and aquaculture business. POCE registered better growth on the back of consolidation of Boilermech while ILF division enjoyed the better unit-selling price for raw material trading and higher FamilyMart contribution (whose earnings are parked under the ILF division for the time being). Cumulatively, ILF earnings decreased by -23% YTD due to negative impact from Covid-19 pandemic resulting in lower FamilyMart contribution, low egg price for Peninsular and weak broiler integration performance. Core PATAMI registered a decline of -18.5% YoY due to lower EBIT margin recorded -1.4ppt YoY while YTD decline of -2.9% was on the back of higher effective tax rate (FY21: 24.8%, FY20: 22.1%).

Outlook. Moving forward, we expect MPM to remain the main driver for earnings sustainability with its resilient sales of frozen food products. ILF on the other hand may face challenges with fluctuation of egg prices despite its ventures in Vietnam and Indonesia. We believe FamilyMart division will be impacted from weaker transactions volume in 1QFY22 with rising cases of Covid-19 that hampered the foot traffic coupled with operating hour’s restrictions and less optimal operations in shopping malls and train stations under MCO3.0.

Forecast. We lower our forecast for FY21/22 by -4%/-5%, respectively to account for the deviations above.

Maintain HOLD. After earnings adjustment and rolling over our valuation year to FY23, our TP decreases from RM5.88 to RM5.81 based on an unchanged 50x PE. Despite the rich valuations that QL currently trades at, this is perhaps justified by its status as a key consumer staple.

Source: Hong Leong Investment Bank Research - 28 May 2021