QL reported a good set of results in 9MFY19 which tracked above our expectations – 80% and 76% of our and consensus FY19E forecasts – mainly on lower-than-expected taxes, but was in-line operationally. Core earnings grew 11% yoy, driven by sustained momentum in the MPM and ILF segments, while offset by weaker contribution from the POA segment. We expect the latter’s earnings to gradually improve on better FFB production while CPO prices have also traded higher YTD. Maintain BUY with an unchanged DCF-derived TP of RM8.00.

Operationally Within Expectations

QL’s 9MFY19 core net profit grew by 11.1% yoy to RM175.m on the back of higher revenue of RM2.72bn (+9.5% yoy). The growth is attributable to a strong showing from its Marine Product Manufacturing (MPM) and Integrated Livestock Farming (ILF) segments, where revenue grew by 9.2% and 16.4% yoy respectively, while PBT grew by 18.9% and 7.6%. The MPM segment’s sales and margins expanded due to a recovery in fish catch, higher contribution from surimi-based products, as well as higher yield from its prawn aquaculture activities. The ILF segment gained on higher ASPs and margins of raw feed materials traded, albeit offset by lower contribution from its poultry farming units.

POA Segment Recovered Sequentially

In 3QFY19, the Palm Oil Activities (POA) segment recovered from a challenging 1HFY19 which suffered from poor FFB production and oil extraction rate (OER) due to bad weather, alongside depressed CPO prices. In spite of lower revenue in 3QFY19 (-14.6% qoq) as CPO prices declined further, PBT rebounded strongly from 2QFY19’s pre-tax losses due to significantly improved margins, underpinned by better OER, higher FFB processed, as well as better CPO milling margins. Going forward, we expect an improved POA performance (9MFY19: -46% yoy) on the back of better FFB production and CPO prices (based on our in-house projection).

Maintain BUY With An Unchanged TP of RM8.00

We make no changes to our earning estimates, aside from a lower FY19E tax rate assumption. We continue to like QL for its solid long-term growth prospects, particularly with the Family Mart operations which complements its defensive core businesses. QL remains as one of our sector and country’s top BUY call, with a DCF-derived 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) further decline in CPO prices.

Source: Affin Hwang Research - 1 Mar 2019