QL's  1HFY13  results  were  largely  within  consensus  and  our  expectations.   The  company's  top-  and  bottomlines  expanded  by  10.2%  and  3.8%  y-o-y  respectively, mainly driven by sterling performance by its MPM division. However,  overall  margins  weakened  as  MPM's  strong  showing  was  offset  by  thinner  margins  from  ILF  and  POA.  We  see  a  better  2H  due  to  additional  contributions  from  its  Surabaya  plant  after  an  expansion  in  its  capacity,  as  well  as  better  ILF margins arising from higher egg prices. Maintain BUY, FV unchanged at RM4.05.

MPM  division  leads  the  pack.  QL's 1HFY13  revenue  and  earnings  rose  10.2%  and  3.8%  y-o-y  to  RM1046.8m  and  RM68.3m  respectively.  We  deem  the  results  in  line  as  1H  is  usually  weaker  and  the  potential  earnings  contribution  from  its  Surabaya  surimi  plant  following  a  ramp-up  in  capacity  will  only  materialize  in  2H.  The  improved  sales  from  its  marine  product  manufacturing  (MPM)  and  integrated  livestock  farming  (ILF) divisions lifted overall revenue, while palm oil activities (POA) posted lower growth. MPM  turnover surged 24.7% y-o-y, largely fuelled by higher returns from the group's fisheries  operations in Malaysia and Surabaya. Meanwhile, the ILF division's sales jumped 19.3%  y-o-y  due  to  higher unit  prices  of  feed  raw  materials  and  better  sales  contribution  from  the group's poultry farm in Indonesia. However, revenue from its POA division fell 29.1%  due to the drop in CPO price (RM3,002 vs RM3.213 y-o-y) and the decline in processed  FFB. Compared to the preceding quarter, the overall revenue and earnings were higher  by 11.8% and 17.5% y-o-y, buoyed by commendable numbers from the MPM division. 
 
Margins  erosion.  EBITDA  and  PBT  margins  dipped  10bps  and  20bps  y-o-y  to  12.2%  and 8.6% respectively. However, the better PBT margin from the MPM business (15.9%  vs  12.3%  y-o-y)  was  offset  by  that  in  the  ILF  (6.4%  vs  8.6%  y-o-y)  and  POA  (4.0%  vs  5.6% y-o-y) segments. PBT margin in the ILF division was narrower owing to poor egg  margins  arising  from  lower  egg  prices  and  high  feed costs. Meanwhile,  egg production  costs rose 20% from 22 sen to 26 sen as corn and soybean prices inched up. In view of  the recent recovery in egg prices, we believe ILF margins are likely to be slightly better  for the remaining quarters of FY13.

Maintain  BUY.  We  expect  QL  to  report  better  numbers  in  2H,  due  to:  i)  additional  contributions arising from the 5k-tonnes capacity expansion at its Surabaya plant, and ii)  better margins from ILF in tandem with higher egg prices. The group's future growth will  mainly be driven by the expansion of its marine-based businesses in Indonesia, as well  as integrated livestock and palm oil activities. Maintain BUY, with RM4.05 FV, based on  19x CY13 EPS.

Source: OSK