Period  1Q14

Actual vs. Expectations   1Q14 net profit (NP) of RM34.9m was broadly in line, aking up 21% and 22% of the street’s estimate and ur forecast of RM163m and RM157m respectively.

Seasonally, 1Q usually makes up 21%-24% of the fullyear earnings.

Dividends  No dividend was declared in the quarter.

Key Result Highlights    YoY, revenue was up by 17.2% underpinned by higher sales recorded in the integrated livestock farming (“ILF”) (+25.4%), marine products division (“MPM”) +6.1%) and palm oil activities (“POA”) (+6.4%).

 The strong growth registered in ILF was mainly due to higher farm produce prices, recovery of unit value and higher volume of feed raw material sold. Meanwhile, improvement in MPM was due to better fishmeal and surimi-based products contribution while POA benefited from the increased in volume of FFB processed.

 PBT improved 5.1% YoY despite a margin compression of 0.9ppt to 7.5% in 1Q14 as the highermargin recorded by MPM (17.5% in 1Q14 vs. 12.6% in 1Q13) was not enough to cushion the margin compression in both ILF (5.4% in 1Q14 vs. 7.4% in 1Q13) and POA (incurred losses in 1Q14 vs. 4.6% in 1Q13).

 Better results in MPM were mainly due to the reason mentioned above as well as on better product prices. However, lower margin from ILF was due to weaker the Ringgit, higher feed protein cost and lower margin from raw material trading. Meanwhile, POA turned red for the first time in many years due to the significantly lower CPO prices (RM2,245 vs RM3,195 a year ago) and the losses from its Indonesia’s plantation & milling operations. (see overleaf for details).

 Higher NP growth of 11.2% YoY. Nevertheless, the lower tax bracket (18.2% vs. 20.5% in 1Q13) and minority interest resulted in higher NP growth.

 QoQ, 1Q14 revenue was up by 2.9% underpinned by higher sales recorded in MPM (+5.8% QoQ) and POA (+9.0 QoQ). Better sales in MPM was mainly due to seasonal effect and better prices while improvement in POA was due to sales arising from brought forward stock from previous month. Meanwhile, PBT also improved slightly by 3.4% QoQ, largely hold up by the contribution from MPM (+44.6% QoQ) which helped to mitigate the decline in POA (-116% QoQ) and ILF (-8.4% QoQ).

Outlook  Despite the expansion plans and greater margin fromMPM, we remain neutral on QL as the ILF and POA divisions are still in the midst of getting over the recovery stage, especially the POA (see overleaf for details).

Change to Forecasts  We are maintaining our FY14E NP at RM157.1m.

Rating  Maintained MARKET PERFORM

Valuation  Maintained our TP of RM3.40 based on an unchanged FD FY14E PER of 18.5x.

Risks  The global economic and weather uncertainties.

Other Points What’s going on with POA? We understand from the management that the POA division’s swing into the red was due mainly to the lower CPO prices that resulted in lower earnings from the Malaysia’s operations which was unable to mitigate the losses from the from its Indonesia operation which comprises mainly young trees. However, the management expects the losses from Indonesia for the current financial year to be smaller than FY13. At the current level of CPO prices, the company would have to achieve 5k mt of fresh fruit bunches (“FFB”) per month to breakeven (currently already stand at 3,500mt per month) and expects the FFB yield to continue improving further in the coming quarters. On the other hand, our plantation analyst maintains his current CY13-CY14 average CPO price at RM2,400/mt-RM2,700/mt despite potential increase in inventory because the impact will not be significant due to demand support from strong crude oil prices coupled with the weakening Ringgit. Hence, we expect the earnings from its Malaysian plantation to be better than the current quarter. In conclusion, the FY14 earnings growth for the division should remain flattish.

Source: Kenanga