QL’s 1QFY18 core net profit grew by 4.4% yoy to RM43.9m, which was below expectations despite being a seasonally weak quarter. This was driven by improvements in both the Integrated Livestock Farming (ILF) and Marine Product Manufacturing (MPM) segment, but was offset by significantly weaker Palm Oil Activities (POA) segment results. After refining our forecasts and tweaking our WACC, we maintain HOLD on QL with a revised TP of RM5.90.

1QFY18 Earnings Were Below Our and Consensus Estimates

QL’s 1QFY18 revenue improved by 4% qoq and 5% yoy mainly driven by the ILF segment, which saw higher sales contribution from the feed raw material trade (better margins) and better regional poultry operations. The MPM segment showed relatively muted topline growth due to a slow recovery after the low fish cycle post-El-Nino. The POA segment on the other hand was disappointing as expected, due to poor FFB production and FFB processed especially in the Indonesian plantation unit. 1QFY18 core net profit of RM43.9m came in below expectations, accounting for 17% and 18% of our and consensus estimates respectively.

Moderate Improvement on ILF and MPM, Bleak Outlook on POA

We expect some improvement in the MPM segment driven by capacity expansion for frozen surimi-based products and a recovery in fish catch. Likewise, the ILF segment also is expected to improve from capacity expansion for commercial feedmill and broiler production as well as a recovery in egg prices. We also expect the convenience store chain business to continue narrowing its losses. On the other hand, the outlook for the POA segment is moderately bearish as heavy rainfall is likely to affect the Indonesian plantations till atleast 2HFY19. Furthermore, margins are likely to contract in tandem with declining CPO prices.

Maintain HOLD With a Revised DCF-based TP of RM5.90

We are revising down our FY19-21E forecasts as we temper our revenue growth assumptions, considering the earnings miss. Nonetheless, we believe that QL is still supported by sustainable growth drivers. We make some adjustments to the beta for our WACC assumptions, and maintain our HOLD call on QL Resources with a higher DCF-derived TP of RM5.90 (implying 39x CY19 earnings estimates). Upside risks include i) Improving CPO prices, ii) Better demand for surimi-based products. Downside risks include i) Bad weather affecting the POA segment, ii) Disruption in capacity expansion.

Source: Affin Hwang Research - 28 Aug 2018