Continuing to Deliver

QL Resources’ 6MFY20 results met our and consensus expectations, with revenue and core net profit posting double-digit growth yoy. The marine segment remains its key earnings driver on the back of a sustained recovery in fish catch. The livestock and palm oil segments are expected to post stronger results in 2HFY20 owing to higher production alongside a recovery in ASPs. Reiterate BUY on QL with an unchanged 12-month TP of RM8.50.

Within Expectations

Turnover rose 19% yoy to RM2.1bn in 6MFY20, with higher production driving stronger sales for its Marine Products Manufacturing (MPM) segment (+24% yoy) and Integrated Livestock (ILF) segment (+23% yoy), although this was offset by the weaker Palm Oil Activities (POA) segment which posted a lower FFB production amid weaker CPO prices. 6MFY20’s core net profit growth of 15% yoy to RM120m was predominantly led by MPM’s robust earnings expansion (+43% yoy), while the ILF segment (-6% yoy) was mainly affected by a fluctuation in feed raw material prices and poultry ASPs that were partially mitigated by Family Mart’s operations which broke even in 1QFY20. The POA segment remained profitable, due to an improvement in oil extraction rates as well as sturdy associate earnings by Boilermech, but made an insignificant contribution to group earnings due to weak CPO prices. The results were within expectations, accounting for 48% and 49% of consensus and our full-year estimates respectively.

ILF and POA’s Sequential Recovery Likely to Drive a Stronger 2HFY20

QL’s palm oil operations are expected to deliver a markedly strong earnings contribution in 2HFY20 in tandem with the sustained recovery in CPO prices, while the ILF segment should continue to record sequential margin improvement on a reduction in the volatility of feed raw material prices and higher earnings contribution from its regional poultry operations on the back of higher production. As such, we continue to foresee a seasonally stronger 2HFY20, with the MPM segment still benefitting from ample fish catch and expanded production capacity.

Reiterate BUY

Our earnings estimates are left unchanged as the results were deemed largely in line. We maintain our BUY recommendation on QL with an unchanged SOTP-derived TP of RM8.50. Downside risks include: 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 - 2 Dec 2019