QL’s 1QFY22 core PATAMI of RM42.2m (QoQ: +20.3%, YoY: -17.1%) came in below our (15.3%) and consensus (14.8%) estimates. Despite the near term weakness in MPM division, we expect earnings to pick up 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. Additionally, we opine that FamilyMart sales will pick up in the coming quarters following further relaxation of movement restrictions. We lower our forecasts for FY22/23 by -6%/-4%. Maintain HOLD with lower TP of RM5.73 (from RM5.81) based on an unchanged 50x PE of FY23 EPS.

Below expectations. QL chalked in 1QFY22 results with revenue of RM1.2bn (+1.0 QoQ; +26.3% YoY) and core PATAMI of RM42.2m (QoQ: +20.3%, YoY: -17.1%). This came in below our (15.3%) and consensus (14.8%) estimates. The deviation was on the back of deteriorating operating profit contribution due to lower selling volume and elevated feed costs.

Dividend. Declared final single tier dividend of 3.5sen/share going ex on 4 Oct 2021for FY21. QL typically only declares dividend once a year, usually in Jul or Aug of the following FY.

QoQ. Revenue was flat at +1.0% to RM1.2bn. The improvements in palm oil and clean energy (POCE: +8.1%) and integrated livestock farming (ILF: +4.3%) were moderated by the drag in marine product manufacturing (MPM: -10.8%). ILF’s better sales were attributable to higher sales form farm produce. However, ILF’s earnings decreased by -40% due to higher feed costs, poor egg prices and weaker broiler integration performance. Despite flat revenue, core PATAMI registered +20.3% improvement due to lower effective tax rate. (1QFY22: 25% vs adjusted tax rate 4QFY21: 42%).

YoY. Top line increased by 26.3% driven by higher sales from POCE (>100%) and ILF (+32.8%) divisions. Increased sales in POCE were due to consolidation of Boilermech’s sales following it becoming a subsidiary in 4QFY21 coupled with higher CPO selling price. ILF on the other hand, benefited from the high feed raw material trading price. MPM sales weakened as a result of severe disruption in fishing and manufacturing activities following elevated Covid-19 cases. On the flipside, bottom line dragged by -17.1% attributable to EBITDA margin compression by -3.9ppt on the back of (i) higher operating cost in MPM from lower production volume; and (ii) appreciation of Indonesian Rupiah in POCE division.

Outlook. We note that the weakness on MPM division was on the back of the disruptions in manufacturing production from the capacity constraints. Despite the near term weakness, we expect MPM earnings to pick up 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 better off in the coming quarters following further relaxation of movement restrictions. Note that FamilyMart contributed RM2.7m earnings increase for ILF in 1QFY22. Furthermore, we expect better profitability in the POCE division from higher CPO prices, which have recorded exponential increase since mid-June.

Forecast. We revise our FY22/23 earnings downward by -6%/-4% after baking in lower margin in light of the challenging outlook.

Maintain HOLD. After earnings adjustment and rolling over our valuation year to FY23, our TP decreases from RM5.81 to RM5.73 based on an unchanged 50x PE. While we like QL for its diversified revenue streams, savvy management and growing FamilyMart division, we reckon QL is fairly priced at current level.

Source: Hong Leong Investment Bank Research - 26 Aug 2021