9M18 core net profit increased by 7.5% yoy to RM160m and was broadly in-line with our and consensus forecast, accounting for 74% of full-year estimates. 9M18 PBT was flat, as poor performance at the MPM division was offset by growth in the POA and ILF divisions. Nevertheless, MPM’s 3Q18 PBT margin improved by 0.2 ppts qoq and we expect stonger margin sequentially. While we still like its growth prospect, we downgrade QL to HOLD rating with unchanged TP of RM 5.00 after its recent share price outperformance.

Decent Revenue Growth Across All Segments in 3Q18

In 3Q18, Marine product manufacturing (MPM), Palm Oil Activities (POA), and Integrated Livestock Farming (ILF) saw decent revenue growth of 16%, 16% and 9% yoy respectively, translating to 12% yoy growth in QL’s total revenue to RM892m. Its sales were lifted by higher contribution from surimi-based products operation, higher FFB production and FFB processed in Kalimantan region, and higher contribution from Indonesian and East Malaysia poultry operations. 9M18 core net profit accounted for 74% of our full-year estimates and was in line with expectations.

3Q18 PBT Margin Affected by MPM Division

3Q18 PBT increased only by 3% yoy to RM77.8m as PBT margin dropped by 0.7ppts yoy to 8.7% compared to 9.4% in 3Q17. The drag mainly came from the MPM segment where PBT margin dropped from 20% in 3Q17 to 14.8% in 3Q18, due to post El-Nino low fish cycle in Malaysia especially in thr Kota Kinabalu region. However, we expect it to recover to 16-18% in thr coming quarters. For the ILF division, PBT increased by 47% yoy due to higher contribution from Indonesia and its East Malaysian poultry farm operations. Despite 16% yoy sales growth for the POA division, PBT was flat at RM10m due to lower CPO price (RM2,592 vs RM2,867 in 3Q17) and lower OER (resulted from heavy rainfall).

Downgrade to HOLD With An Unchanged DCF-based TP of RM5.00.

We maintain our forecast of 15% earnings CAGR for FY17-19E on the back of higher FFB processed, recovery in MPM margin post El-Nino, and growing momentum of Family Mart store expansion. Although we continue to like QL as a diversified consumer play, we downgrade QL to HOLD with an unchanged TP of RM5.00 as we believe positive catalysts have been priced in given recent share price performance. Risks include the effects of El-Nino, upside/downside to CPO pricing, upside/downside to egg prices, delays in capacity expansion and competition in the CVS segment.

Source: Affin Hwang Research - 27 Feb 2018