1Q18 PBT declined by 4.6% yoy due to a 11%/19% yoy decline in the MPM/ILF segment while a 159% yoy growth in POA helped to offset the impact. Despite a 16% yoy revenue growth, higher operating cost arising from competition and poor fish catch affected margins. 1Q18 net profit accounted for 19% of our FY18 forecast, slightly below our expectations. Nonetheless, we expect improved margins across all segments and we are still positive on its long term outlook. Maintain BUY with an unchanged TP of RM 5.56.

1Q18 Revenue Growth of 16% Yoy Driven by POA/ILF Segments

QL’s 1Q18 revenue increased by 16% yoy driven by a 30% yoy in POA and 23% yoy increase in ILF. Thr POA segment benefited from an increase in FFB processed by the Indonesian plant and higher CPO prices of RM2,746 vs RM2,512 in 1Q17. The ILF segment was helped by higher sales in feed raw material trade. However, MPM sales were flat during the quarter due to post El-Nino low fish cycle in Malaysian waters especially at its Kota Kinabalu unit.

PBT Affected by Higher Operating Cost in MPM and ILF

PBT declined by 4.4% yoy to RM50.4m as PBT margin dropped by 1.4ppts yoy to 6.5%. MPM’s PBT margin dropped from 16.3% in 1Q17 to 14.6% in 1Q18 due to post El-Nino low fish cycle. However, it has improved from 11.4% in 4Q17 and management expects improving fish catch to lift PBT margins to 16%-18% for FY18. For the ILF segment, PBT declined by 19% yoy as margins fell by 1.5ppts yoy to 2.7%. Lower peninsular egg prices was expected, but it came to us as a surprise that QL Resources competed on pricing to fend off new players in feed raw material trade in Malaysia. Management expects better margins in the ILF segment in 2HCY17 as it sees Peninsular egg price to recover in August and competition abating.

Maintain BUY With An Unchanged DCF-based TP of RM5.56.

Although 1Q18 started off softly, we expect improvement in subsequent quarters on the back of higher FFB processed, better fish catch post ElNino, and abating competition in ILF segment.We make no changes to earnings and continue to like QL as a diversified consumer play given its ability to weather through tough times, its foray into the attractive downstream segment and strong management team. Maintain our BUY rating and 10-year DCF-based 12-month TP of RM5.56. Downside risks include the effects of El-Nino, downside to CPO pricing, downside to egg prices, delays in capacity expansion and competition in the CVS segment.

Source: Affin Hwang Research - 25 Aug 2017