1H18 core net profit increased by 10.1% yoy to and was broadly inline with consensus forecast, accounting for 46-47% of full-year estimates. 2Q18 PBT only increased marginally by 1% yoy, but jumped 41% qoq due to margin improvement for ILF segment. We expect improved margins across all segments, leading to stronger sequential growth in coming quarters. We are still positive on its long-term outlook and maintain BUY with an unchanged TP of RM4.31.

2Q18 Revenue Growth of 10.9% Yoy Driven by POA/ILF Segments

QL’s 2Q18 revenue increased by 10.9% yoy driven by a 14% yoy rise in POA (palm oil activities) and 16% yoy increase in ILF (integrated-livestock farming). The POA segment benefited from an increase in own FFB production, FFB processed by the Indonesian plant and higher CPO prices of RM2,650 vs RM2,507 in 2Q17. The ILF segment was helped by higher sales contribution from Indonsia poultry and higher sales in feed raw material traded. 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.

2Q18 PBT Affected by Higher Operating Cost in MPM

PBT increased only by 1%% yoy to RM71.2m as PBT margin dropped by 0.9ppts yoy to 8.8%. MPM’s PBT margin dropped from 17.9% in 2Q17 to 14.6% in 2Q18 due to post El-Nino low fish cycle. However, the margin has stabilised and management expects improving fish catch to lift PBT margins to 16%-18% for FY18E. For the ILF segment, PBT rose by 26% yoy as margin improved 0.5ppts yoy to 7% on the back of higher contribution from Indonesia operation, improving egg price and abating competition in feed raw material trade.

Maintain BUY With An Unchanged DCF-based TP of RM4.31.

1H18 core net profit accounts for 46% of our full-year estimates, broadly inline with our expectations. We make no changes to earnings and we expect improvement in subsequent quarters on the back of higher FFB processed, better fish catch post El-Nino, and abating competition in ILF segment. We continue to like QL as a diversified consumer play. Maintain our BUY rating and DCF-based 12-month TP of RM4.31. 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 - 28 Nov 2017