QL’s 9MFY23 PATAMI of RM273.5m (+85% YoY) came in above our and consensus estimates at 86%/84% respectively. We applaud MPM’s sustained momentum with better sales volume and selling prices. As for ILF, we opine the segment to be supported the recovery in volume and prices coupled with government’s cost subsidy. We increased our FY23/24/25 forecasts by 13%/12%/12% respectively. Upgrade to BUY with higher TP of RM6.68 (from RM5.90) based on unhanged 45x PE of FY23 EPS.

Exceed expectations. QL chalked in 3QFY23 results with revenue of RM1.6bn (-1% QoQ; +16% YoY) and PATAMI of RM97.2m (+4% QoQ, +63% YoY). This brought 9MFY23 sum to RM273.5m (+85% YoY), making up 86%/84% of our and consensus forecasts. This exceeded our and consensus expectations owning to the margin expansion recorded and stronger recovery in sales.

Dividend. None declared (9MFY22: none). 3QFY21: none (9MFY21: none). QL typically declares dividend only once a year, usually in Jul or Aug of the following FY.

QoQ. Sales remain flat by -1% to RM1.6bn. Marine product manufacturing (MPM) increased by +3% thanks to better selling price for all activities and volume recovery for surimi-based product. Palm oil and clean energy (POCE) recorded softness by - 14% attributable to slower project progress at Boilermech and lower CPO selling price for palm oil activities. Integrated livestock farming (ILF) was flat where higher feed raw material trading price was offset by lower volume. PATAMI remain fairly unchanged at RM97.2 (+4%) lifted by better PBT from ILF due to improved margin of layer operations from improved operational efficiency and cost subsidy by government.

YoY/YTD. Top line grew by +16% YoY/ +24% YTD driven by higher sales from MPM (+10% YoY), CVS (+23% YoY) and ILF (+30% YoY) divisions despite the drag from POCE (-29% YoY). Improvement in MPM due to higher selling prices across all business units and improved selling volume for surimi -based products. ILF benefitted from the higher feed raw material trading volume and price as well as higher farm produce selling price. Remarkably, ILF PBT jumped by 15x due to market recovery amidst tight supply of eggs for both Vietnam and Malaysia market. Bottom line expanded further by +63% YoY/ +85% YTD to RM273.5m owning to (i) better sales; (ii) EBITDA margin improvement by 1.2ppt; and (iii) lower effective tax rate (9MFY23: 22.9% vs 9MFY22L 27.9%).

Outlook. We take comfort on its MPM sustained momentum with better sales volume and selling prices. Note that MPM segment has historically been the earnings driver with the sales of its frozen food products which contributes about 60 -63% of PBT. As for ILF, we opine the segment to be supported the recovery in volume and prices coupled with government’s cost subsidy which could help to buffer margin compression. CVS current quarter sales decreased marginally due to lower average sales per store with the dampened consumer sentiment. Additionally, the higher input cost and labour cost affected the margin negatively. Management remains cautiously optimistic with the softening of consumer sentiment due to rising inflationary pressure and economic slowdown.

Forecast. We increased our FY23/24/25 forecasts by 13%/12%/12% respectively to account for better revenue and margin expansion.  

Upgrade to BUY (from Hold), with higher TP of RM6.68 (from RM5.90) based on unchanged PE of 45x of FY23 EPS. We expect QL’s biggest segments namely MPM and ILF divisions to continue charting rosier growth. Its rich valuation is justified by its status as a key consumer staple.

Source: Hong Leong Investment Bank Research - 1 Mar 2023