Post the 1H18 results that delivered 10.1% yoy core net profit growth, we expect a stronger 2H18 underpinned by improved margins across all segments. Family Mart’s expansion over the years has been well received by consumers and we believe an earlier breakeven is possible. We are still positive on the prospects of all segments going into FY19E, forecasting 15-20% earnings growth vs. 16% in FY18E. We roll forward our valuation to FY19E and increase our DCF-derived TP to RM5.00.

Weak MPM Margin Likely be Temporary

1H18’s MPM margin was 14.6% vs 16.5% in FY17 due to the low fish catch post El Nino. Furthermore, the monsoon season is affecting the fish catch in Kota Kinabalu, Sabah. Hence, we believe that the MPM margin could stay at 14%-15% in 3Q18 before seeing improvement going into FY19. We expect the PBT margin to improve to 16-18% in FY19 driven by a recovery in the fish catch and the completion of new plants. A new chilled surimi-based product plant with a capacity of 25k mt and another one for frozen surimi-based products with a capacity of 15k mt will be completed in 4Q18. We understand that the new plants will have a higher level of automation which is expected to improve margins.

Family Mart Is Gaining Momentum

QL has opened 30 stores as at 20 December 2017, and we believe that it will likely exceed its 30-store target by end-FY18E. Based on the pace of expansion and response from consumers, we understand that Family Mart is gaining traction and could break even sooner than our initial forecast of 5 years (see page 4). We have revised our forecasts to assume an earlier breakeven in FY20E instead of FY22E.

Maintain BUY With a Higher DCF-based TP of RM5.00.

We trimmed our FY18E earnings by 2% to factor in a lower MPM margin, but raised our FY19-20E earnings by 2-6% to assume better profitability from the Family Mart operation. We also roll forward our valuation and increase our DCF-based 12-month TP to RM5.00. While this translates into a FY19E PER of 31x, we believe that this is justified as the convenience store segment’s long-term value has not been fully captured and given the defensive nature of its F&B segment. We continue to like QL as a diversified consumer play. We maintain our BUY rating. Downside risks include the effects of El Nino, lower CPO prices, lower egg prices, delays in its capacity expansion and competition in the CVS segment.

Source: Affin Hwang Research - 27 Dec 2017