Period  2Q14/1H14

Actual vs. Expectations The 1H14 net profit (NP) of RM77.2m came in-line within estimates, making up 48% of both the street’s estimate and our forecast of c. RM162m.

Dividends  No dividend was declared in the quarter, as expected.

Key Result Highlights YoY, 2Q14 revenue increased by 9.5%, underpinned by higher sales recorded across all segments, led by marine products division (MPM; +14.0% YoY). However, PBT improved further by 10.1% YoY on the back of margin expansion of 0.7ppt to 6.3%, coming from the integrated livestock farming (ILF) division. The better margin was mainly contributed by the Peninsular Malaysia and Regional Poultry operations.

 YTD, 1H14 revenue was higher by 13.2% YoY supported by the better sales from ILF (+15.6% YoY), MPM (+10.1% YoY) and palm oil activities (POA; +8.4%, YoY). PBT improved only by 7.8% YoY because the higher margin recorded by in MPM division (18.4% in 1H14 vs. 15.9% in 1H13) was insufficient to cushion the margin compression in both ILF (5.9% in 1H14 vs. 6.4% in 1H13) and POA (making losses in 1H14 vs. 4.0% in 1H13). However, due to lower tax bracket and minority interest, it recorded a 13.1% YoY increase in net profits. The strong sales growth registered in ILF was mainly due to higher unit value of feed raw materials traded and higher egg prices. Meanwhile, improvement in MPM was due to better surimibased products and fishmeal contributions.

 QoQ, 2Q14 revenue rose by 4.4% underpinned by higher sales recorded in MPM (+7.9% QoQ) and ILF (+4.2% QoQ). Better sales in MPM were mainly due to seasonal effect while improvement in ILF was due to higher unit value of raw materials traded. Meanwhile, PBT recorded strong double-digit growth of 21.4% QoQ bolstered by the PBT contribution from ILF (+23.3% QoQ) and MPM (+18.5% QoQ) which helped to mitigate the decline in POA (-36.9% QoQ).

Outlook  Despite the loss in POA, we have a neutral-to-positive stance on QL given: (i) the continuous improvement in

both MPM and ILF results with MPM margins sustaining above the 5-year average margin of 14% in the recent quarters while ILF margins have been improving nearer to the average margin of 7.8% in 2Q14 and (ii) that basic food items will be GST zero-rated, making QL a potential beneficiary.

Change to Forecasts We are maintaining our FY14E and FY15E NPs at RM162m and RM190m.

Rating Maintained MARKET PERFORM

Valuation  On a positive note, we are revising our TP upwards from RM3.74 (or RM2.73 on a basis of ex-bonus & rights) to RM4.62 (or RM3.32 on a basis of ex-bonus & rights) as we roll over our valuation basis to FY15E and revised the PER to 20.2x (+1.0 SD above average) from the 3-year average of 18.5x previously.

 We believe the higher PER is justifiable due to: (i) continuous margins expansion in MPM and ILF and (ii) QL being a potential beneficiary of GST implementation.

Risks  The global economic and climate uncertainties.

Source: Kenanga