Result

• QL Resources’ 2QFY17 net earnings stood at RM50.52mil, which increased 19.9% q-o-q but declined 8.4% y-o-y. Meanwhile, 2QFY16 revenue was RM729.7mil, up 9.0% q-o-q and 5.7% y-o-y.

• For 1HFY17, net profit was registered at RM92.6mil, declining 3.6% y-o-y. However, 1HFY17 revenue rose by 4.0% y-o-y.

• Below expectation. The Group’s 1HFY17 net profit was below our and consensus expectations, only meeting 42% and 41% of full earnings respectively, attributable to weaker performance in Marine Product Manufacturing (MPM) division as well as Palm Oil Activities (POA) division.

Comment

• Lower earnings in 1HFY17. The better performance of Integrated Livestock Farming (ILF) division in this quarter was not enough to mitigate the negative performance of Marine Product Manufacturing (MPM) and Palm Oil Activities (POA) divisions. Hence, the group’s earnings declined by 3.6% y-o-y despite positive growth in topline of 4.0% y-o-y.

• Lower margin affected Marine Product Manufacturing (MPM) division. Profit before tax (PBT) of MPM division for 1HFY17 down by 6.3% y-o-y dented by lower overall margins from its fisheries products. Similarly, MPM’s PBT in 2QFY17 decreased by 8.4% y-o-y amid lower in PBT margin by 2.7ppts of which we reckon was attributed to the weaker fish landing, and lower fishmeal price. However, its revenue in 1HFY17 as well as 2QFY17 increased in its yearly basis aided by higher export contribution of fishmeal, surimi and surimi-based products. Meanwhile, on q-o-q basis, MPM division managed to post a positive growth in its topline and bottomline supported by overall improvement of margins of fisheries products.

• Integrated Livestock Farming (ILF) division performed well. PBT of ILF division for 1HFY17 expanded by 16.8% y-o-y following the encouraging growth from Malaysia and regional poultry operations in both quarters, buoyed by overall improvement in farm produced prices and margins. Similarly ILF's revenue in 1HFY17 also posted a positive growth mainly due to higher contribution from Indonesia feedmill unit.

• Similarly, the ILF’s 2QFY17 PBT climbed significantly by 88.8% q-o-q in line with 21.5% q o-q growth in top line. The robust growth in ILF’s PBT for 2QFY17 buoyed by better margin from feed raw material trade coupled with overall improvement of farm produced prices as well as on the gradual uptick in egg prices in Peninsular Malaysia and Vietnam.
   
• Poor performance of Palm Oil Activities (POA) division. PBT of POA division in 1HFY17 declined by 18.2% y-o-y dented by severe drop in FFB processed in East Malaysia as well as El-Nino effect despite improved CPO price (RM2507 vs RM2041) and increase in FFB production in Indonesian plantation unit. Similarly, in 2QFY17, POA division posted a negative growth for both topline and bottomline as compared to 2QFY16 mainly due to lower contribution from associate (Boilermech). Besides, as compared to last quarter, POA’s PBT in 2QFY17 improved 14.7% q-o-q supported by higher contribution from Indonesia plantation unit despite weaker revenue due to EL-Nino effect.

Earnings Outlook/Revision

• We cut our earnings forecast for FY17F and FY18F by 11% and 7% respectively amid lower-than expected results recorded by this quarter as well as to factor in the weaker contribution from POA division going forward amid challenging business environment.

Valuation & Recommendation

• Maintain HOLD call on QL with slightly higher target price of RM4.53 (previous TP: RM4.37) as we roll over our valuation to FY18F. Our valuation is pegged at 24.5x FY2018F PE based on EPS of 18.5 sen.

• Despite the challenging outlook for its Palm Oil Activities (POA) division, we continue to favour the Group for its diversified business operations as well as continued higher demand for its staple food-based products. Going forward, QL earnings will be supported by its new business venture on the development and operation of FamilyMart convenience stores in Malaysia as the first store to be opened by December 2016. QL plans to open 300 FamilyMart stores in Malaysia in five years period based on the track record or experience of FamilyMart stores running in other countries.

Source: JF Apex Securities Research - 22 Nov 2016