QL’s 1HFY19 core earnings came in within our and consensus estimates at RM104.4m (+8% yoy) primarily driven by a solid performance shown in the MPM and ILF segments, but offset by a quarterly pretax loss seen in the POA segment which was affected by a low OER and a decline in CPO prices. Despite this, we deem the 1H19 earnings satisfactory and expect better CPO prices in 2H19 to support a relative recovery in the POA segment earnings. Maintain BUY with an unchanged 12-month TP of RM8.00.

MPM and ILF Segments Drove 1H19 Earnings…

QL’s 1HFY19 earnings came in within our and consensus estimates at 48% and 46% of the full-year forecasts respectively. The 8% earnings growth was underpinned by a 9% improvement in revenue particularly from the marine product manufacturing (MPM) and integrated livestock farming (ILF) segments. The MPM segment recorded growth on both a qoq and yoy basis from a higher amount of surimi-based products sold and a recovery in fish catch. The ILF segment benefitted from better egg prices in Peninsular Malaysia but this was offset slightly by lower contributions from the Indonesia and East Malaysia poultry units. We expect both the MPM and ILF segments to contribute positively in 2H19 underpinned by margin recoveries.

…but This Was Offset by a Weak Showing in the POA Segment

The palm oil activities (POA) segment saw a challenging 1H19, however, as production at both the East Malaysian and Indonesian plantations were affected by poor fruit setting and post El-Nino tree stress in older plants. This was exacerbated by a lower oil extraction rate (OER) and lower realised crude palm oil (CPO) prices for the quarter which we estimate to have declined by 17% yoy and 7% qoq. This caused the POA segment to dip into losses in 2QFY19. We expect 2H19 to be relatively better for the POA segment based on our in-house assumptions of better CPO prices moving forward.

Maintain BUY With An Unchanged DCF-derived TP of RM8.00

We maintain our earnings forecasts. We continue to like QL due to its solid long-term growth prospects, particularly in its Family Mart operations which provides a strong basis for earnings growth in the future. Thus, we retain QL as our top sector BUY call with a DCF-based TP of RM8.00 (CoE of 7.8%; terminal growth of 3.8%). Risks to our call include: i) disruptions in expansion plans in the Family Mart operations, ii) Intensifying competition in the convenience store space, iii) continued decline in CPO prices.

Source: Affin Hwang Research - 27 Nov 2018