QL Resources’ (QL) FY19 results tracked both our and consensus’ expectations, accounting for 95% of full-year estimates. Core net profit grew 11% yoy, as better performances from the ILF and MPM segment in particular more than made up for the weaker POA segment’s showing. QL’s outlook remains robust, while supported by its CVS segment’s breakout in FY20. Maintain BUY with an unchanged DCF-derived TP of RM8.00.

Within Expectations

FY19’s decent core earnings growth of 11.2% yoy to RM216.7m was underpinned by top-line expansion (+10.7% yoy) alongside modest margin improvement. The key earnings driver came from the Marine Products Manufacturing (MPM) segment (PBT +23.5% yoy), followed by the Integrated Livestock Farming (ILF) segment (+3.3% yoy) while slightly offset by a weaker Palm Oil Activities (POA) segment contribution (-1.6% yoy). MPM revenue and earnings benefitted off a sustained recovery in fish catch throughout the year, alongside higher contribution from surimibased products. ILF earnings growth lagged despite a 17% yoy top-line expansion, attributable to periodic weakness from the poultry businesses. On the other hand, POA recovered from a poor 1HFY19, which was affected by adverse weather effects, while also recording higher associate contribution from Boilermech for the year.

A Breakout Year for CVS Segment

Heading into FY20, we expect the MPM segment’s momentum to sustain, fueled by further capacity expansion amid healthy fish catch cycle. The POA segment’s performance is also expected to improve off the back of an envisaged recovery in CPO prices and better fruit yields. We observed that local poultry prices have stabilised over the current quarter thus far, which bodes well for the ILF segment. On the other hand, QL’s Family Mart convenience stores (CVS) operations are foreseen to breakeven by mid-FY20E, with the segment set to be reported on its own from 1QFY20.

Maintain BUY

We leave our earnings estimates unchanged, while introducing our FY22E forecasts. QL remains one of our sector and country’s top BUY pick, as we favour its stable earnings delivery with solid long-term growth prospects, supported by its well-received Family Mart operations. Maintain BUY, with an unchanged DCF-derived TP of RM8.00 Downside risks: i) disruptions in expansion plans in the Family Mart operations, ii) intensifying competition in the convenience store space, and iii) decline in poultry prices.

Source: Affin Hwang Research - 31 May 2019