Despite the resilient demand for MPM division’s frozen food, the selling volume is expected to remain weak due to seasonal factor and low fishing landing cycle. Management is hopeful that egg prices in Peninsular Malaysia to improve in 2HFY22 with the reopening of HORECA channel s, albeit the margin squeeze in ILF division impacted by higher feed costs. As for FamilyMart, the group is on track to meet its target of 300 stores by end of FY22 with focus on expansions outside Klang Valley. We expect better profitability in POCE segment thanks to higher CPO prices, which have recorded exponential increase since mid-June. Maintain HOLD with unchanged TP of RM5.73 based of 50x PE of FY23 EPS.

Our recent meeting with management lacks material positive developments to alter our neutral view on the stock.

Marine products manufacturing (MPM). Despite the resilient demand for frozen food products, we understand that selling volume is expected to remain weak on the back of seasonal factor and re-emergence of low fish landing cycle. Furthermore, we expect the outlook for 1HFY22 to remain challenging with the supply chain disruptions that continue to add strain on its MPM division.

Downward eggs prices and high feed cost to dent integrated livestock farming (ILF). The ongoing restrictions and low consumptions have caused the ASP for egg prices to be in downward spiral. Additionally, the challenges are made worst with the high feed costs, specifically for soy and corn that both chalked in YTD increase of 25% and 50%, respectively. Having said that, management is hopeful that the egg prices in Peninsular Malaysia will improve in 2HFY22 with the reopening of HORECA channels (hotel, restaurants and cafes), albeit the margin squeeze due to higher feed costs. Additionally, the East Malaysia broiler integration is expected to face similar challenges in 1HFY22 on the back of the elevated cost.

FamilyMart to chart better numbers. QL is on track to meet its store opening target of 300 stores (from 241) by end of FY22 with focus to expand outside of Klang Valley based on the encouraging response. QL’s second central kitchen (CK2) is scheduled to complete in mid Dec 2021. Recently, QL also introduced FamilyMart Mini vending machine concept with snacks and drinks offerings. The first vending machine was introduced in Shell Station Karak Highway 2 (Figure #1) and QL targets of rolling out c.300 machines in the next 3 years. 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.

Better days for palm oil and clean energy (POCE). We expect better profitability in the POCE division thanks to higher CPO prices, which have recorded exponential increase (+30%) since mid-June. Management shared that total FFB tonnage processed are projected to improve in 2HFY22. The consolidation of Boilermech as subsidiary in 4QFY21 will contribute positively to POCE results going forward. Note that POCE division recorded an incremental increase of 152% YoY, thanks to the contribution from Boilermech. Additionally, with the easing of restrictions moving forward, we expect the resumption for engineering, procurement and construction for solar PV system under Boilermech to ramp up significantly on the back of proliferation of green energy adoption.

Forecast. Unchanged.

Maintain HOLD with unchanged TP of RM5.73 based on 50x PE multiple of FY23 EPS. We opine QL’s current risk reward profile to be fair while its rich valuation is justified by its status as a key consumer staple.

Source: Hong Leong Investment Bank Research - 10 Sept 2021