QL’s 1QFY23 core PATAMI of RM82.4m (QoQ: +19%, YoY: 95%) came in above our (36%) and consensus (31%) estimates. Save for the POCE division, sales across the board picked up steadily with the full resumption of economic activities. We take comfort on MPM recovery after the dragged registered in 4QFY22. Note that MPM segment has historically dubbed as the earnings driver which contributes about 60-63% of the group PBT. We revise our FY23/24 earnings upward by +15%/+10% and introduced FY25 figures. After earnings adjustment, our TP increases from RM4.73 to RM5.46 based on an unchanged 50x PE 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.

Beat expectations. QL chalked in 1QFY23 results with revenue of RM1.5bn (+11 QoQ; +24% YoY) and core PATAMI of RM82.4m (QoQ: +19%, YoY: 95%). This beat our (36%) and consensus (31%) estimates. The deviation was on the back of better than-expected sales.

Dividend. None declared. (1QFY22: 3.5sen/share). Note that QL just declared final single tier dividend of 3.5sen/share in May 2022 which subject to approval of shareholders at the forthcoming AGM slated today.

QoQ. Revenue increased by 11% to RM1.5bn. The improvements in marine product manufacturing (MPM: +15%), integrated livestock farming (ILF: +16%) and convenience store chain (CVS: 14%) were moderated by the drag in palm oil and clean energy (POCE: -21%). MPM benefited from improved sales volume with elevated demand from fishmeal and surimi-based products. ILF’s better sales were attributable to higher feed raw material trading volume and selling price coupled with the better farm produce selling price. As for CVS, the continual increase in number of stores and recovery of the footfall aided the performance. POCE suffered from lower CPO tonnage sold and foreign currency translation loss from the weakening of IDR against USD. Subsequently, core PATAMI registered +19% improvements to RM82.4m.

YoY. Top line rose by 24% driven by higher sales from MPM (23%), ILF (+28%) and CVS (44%) that offset the decline in POCE (-8%). Overall, with the normalisation of the economy demands across the group products and services picked up steadily. However, POCE was affected by the weaker performance of palm oil activities affected by significant drop in FFB tonnage produced and lower CPO sales from Indonesia export ban. Subsequently POCE earnings dragged even further registering a loss of -RM4.6m (vs 1QFY22: RM12.2m) due to project margin compression from higher material cost for Boilermech, and weak performance of palm oil activities. On the flipside, bottom line leaped by 95% attributable to (i) EBITDA margin expansion by 1.6ppt on the back of economic of scale with the full resumption economic activities; and (ii) lower effective tax rate by -2.7ppt (1QFY22: 25.4%).

Outlook. We take comfort on MPM recovery recording YoY improvement by 13% QoQ/20% YoY after the dragged registered in 4QFY22. Note that MPM segment has historically dubbed as the earnings driver with the sales of its frozen food products which contributes about 60-63% of PBT for the group. As for ILF, we opine the segment to be supported by the government’s cost subsidy which could help to partially buffer margin compression given the challenging commodity prices. We believe CVS division will continue to contribute positively for the group with the resumption of the economic activities coupled with border reopening. Note that CVS segment chalked in healthy PBT growth of >100% YoY from economies of scale and continuous outlet expansion.

Forecast. We revise our FY23/24 earnings upward by +15%/+10/ respectively after baking in higher sales volume. FY25 figures are introduced.

Maintain HOLD. After earnings adjustment, our TP increases from RM4.73 to RM5.46

based on an unchanged 50x PE 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 - 30 Aug 2022