QL Resources (QL) reported a robust set of results which met both consensus and our expectations, accounting for 20% and 21% of FY20 estimates respectively, with 1QFY20 being a seasonally softer quarter. Turnover rose 22% yoy, to a record high of almost RM1bn, while core net profit grew 15% yoy on the back of the MPM segment’s solid performance. We maintain our earnings estimates and reiterate our BUY call on QL, albeit with a revised SOTP-derived TP of RM8.50 (from RM8.00) upon rolling forward our valuation base to FY21.

Within Expectations; Solid Performance Driven by Marine Division

1QFY20’s strong top-line expansion was driven by the: (i) Marine Products Manufacturing (MPM) segment (+30.1% yoy) with a strong recovery in fish catch; (ii) Integrated Livestock Farming (ILF) segment (+21.9% yoy) due to higher sales from Indonesia and East Malaysia’s poultry operations, alongside Family Mart’s expansion; although (iii) Palm Oil Activities (POA) segment sales were lower (-5.2% yoy), attributed to the softer CPO prices. At the PBT level, MPM was the key earnings driver (+52.4% yoy), led by higher sales and better product mix. This was, however, partially offset by lower contributions from ILF’s (-19.4% yoy) feed raw-material trade and regional poultry operations, while POA’s (-63.2% yoy) operations turned loss-making amid the soft CPO prices and low crop season, albeit cushioned by Boilermech’s higher associate contributions.

ILF and POA Segments Expected to Recover Sequentially

Going forward, we expect the MPM segment to sustain its solid performance owing to the continued recovery in the fish catch cycle over a low base in 6MFY19. For the ILF segment, we expect feed raw-material trade’s margins to pick up, given that the wild swings in corn, soymeal and wheat prices have abated post-1QFY20. The earnings contribution from poultry is also expected to improve on the back of higher qoq selling prices of chicken and eggs locally, while we similarly expect a recovery in CPO prices from July onwards to benefit the POA segment’s earnings.

Maintain BUY, Price Target Raised to RM8.50 (from RM8.00)

We leave our earnings estimates unchanged, while rolling forward our valuation base to FY21. Consequently, we arrive at a higher SOTP-derived TP of RM8.50 (from RM8.00 previously). We maintain our BUY on QL, which is one of our sector and country’s top picks. Downside risks: i) disruptions in expansion plans in the Family Mart operations; ii) deterioration in fish catch conditions; and iii) decline in poultry prices.

Source: Affin Hwang Research - 29 Aug 2019