• Operationally, 1QFY21 results were above our expectations, with PBT coming in at RM80.4m (+29.3%) underpinned by strong contribution from the MPM and POA segments.
• Due to an exceptionally higher tax rate incurred during the quarter, QL posted 1QFY21 earnings of RM50.9m (+0.6% yoy).
• We lift our earnings estimates by 1.8-3.4% for FY21-23E, mainly to factor in higher sales volumes from the MPM segment. Reiterate BUY with a higher TP of RM10.70. QL remains one of our sector and country top picks.

1QFY21 PBT rose 29.3% yoy to RM80.4m - above expectations operationally

QL’s 1QFY21 revenue came in lower at RM970.1m (-2.3% yoy), on the back of declines seen at both the Integrated Livestock Farming (ILF) and Palm Oil Activities (POA) segments but slightly cushioned by higher contribution from Marine Products Manufacturing (MPM). MPM saw higher sales volumes for fishmeal and surimi-based products while on the flipside, ILF experienced lower animal feed raw material trading volume, depressed poultry ASP and lower contribution from Family Mart CVS resulting from the MCO impact. Overall, in tandem with a higher EBIT margin largely driven by the more profitable MPM segment, which benefitted from higher economies of scale, PBT rose +29.3% yoy to RM80.4m. Operationally, we deem the results to be above expectations (1Q being a seasonally soft quarter) - the variance to our forecast was mainly due to higher-than-expected contribution from the MPM segment. A higher tax expense during the quarter, though, saw its core net profit registering a modest +0.6% yoy growth to RM50.9m. Note that the higher tax rate was due to tax expense recognised on the unrealised forex gain in Indonesian Rupiah as per Indonesian tax law. We now forecast full-year effective tax rate at 25% (FY20: 22%).

Expecting Stronger Growth in Subsequent Quarters

Sequentially, revenue declined marginally by -0.9% while core net profit improved by +18.4%. Strong contribution from MPM and POA due to the aforementioned factors more than offset disappointment in the ILF segment, which was affected by the MCO. Going forward, we expect contribution from the MPM segment to remain strong, underpinned by the recovery in out-of-home channels. For the ILF segment, we foresee subsequent quarters to rebound from the blip in 1QFY21, on the back of progressive recovery in demand for both the poultry and CVS operations (included under ILF). Lastly, we foresee the volatility in CPO prices to likely affect sequential earnings contribution from the POA segment, having posted a record quarter in 1QFY21.

Maintain BUY

In view of the better-than-expected results, we lift our earnings estimates by 1.8-3.4% for FY21-23E, largely to factor in higher MPM sales contribution mainly underpinned by sturdy demand for the group’s surimi and surimi-based products. Consequently, our SOTP-derived 12-month TP is raised to RM10.70 (from RM10.50). We reiterate our BUY rating on QL, which remains one of our sector and country top picks. Downside risks include: i) disruptions in Family Mart expansion plans; ii) deterioration in fish catch conditions; and iii) a decline in poultry prices.

Source: Affin Hwang Research - 27 Aug 2020