Period  1Q15

Actual vs. Expectations QL’s 1Q15 net profit (NP) of RM40.4m (up 15.5% YoY, 4.5% QoQ) was deemed as within expectation, accounting for 20.6% and 20.9% of our full-year forecast and consensus’ estimates, respectively. We expect stronger numbers in subsequent quarters on the back of recovery in regional farm produce prices as well as better fishmeal prices.

Dividends  No dividend was declared, as expected.

Key Results Highlights YoY, revenue climbed by 12.8% to RM633.6m from RM579.6m while similarly NP grew 15.5% to RM40.4m from RM34.9m as profit contribution from associates increased to RM5.1m from RM2.7m, up 92%. The improvement in NP was mainly due to the strong performance of its palm oil activities (POA) division, which recorded PBT of RM4.4m from the LBT of RM0.7m a year ago thanks to the higher CPO price (RM2561 vs RM2245) and the reduced losses incurred by the Indonesian operation.

 QoQ, NP rose marginally by 4.5% to RM40.4m from RM34.9m in 4Q14 despite the stronger sales growth of 12.8%, mainly due to the lower contribution (-36%) from POA, which was dragged down by the comparatively lower CPO prices (RM2561 vs RM2619). However, the strong showing of its marine product manufacturing (MPM) division saved the day by recording PBT growth of 37% on the back of higher sales volume.

Outlook  The Group’s near-term outlook could be underpinned by its MPM division. We expect MPM to contribute 49.2% and 50.9% to the Group PBT in FY15 and FY16, respectively, as the Group expanded its surimi-based production capacity by 15k MT or 11% of total capacity to 150k MT end of 2013.

 Moving forward, the Group’s earnings is expected to be exposed more to CPO prices with its FFB production projected to grow by at least 20% in FY16 due to its matured young tree age profile of 4-7 years old.

 As for the integrated livestock (ILS) division, the Group expects improved performance moving forward on the back of the recovery in regional farm produce prices. In 1Q15, egg prices fell to 3-4 sen to c.25 sen in East Malaysia, Indonesia and Vietnam markets due to the lower consumption as well as on seasonal factors. However, we gathered that egg price has recovered and thus we expect better numbers to be reflected in 2Q15.

Change to Forecasts We factor in the new CPO price assumption of RM2500 (from RM2800/mt) after our plantation analyst’s revision. Besides, we also fine-tune our effective tax rate assumption to 20% from 25% to be in line with the historical trends. As a result, FY15E-FY16E net profits forecasts were toned down by 0.4%-3.1%, respectively.

Rating Maintain OUTPERFORM

 We like QL due to its sustainable earnings growth with 18.8% and 13.3% EPS growth projected in FY15E and FY16E, respectively, with growth seen from all operating divisions. Besides, we also expect the Group to be least impacted by the subdued consumer sentiment as their products are mainly non-discretionary in nature.

Valuation  We raised our Target Price to RM3.71 (from RM3.51) after ascribing higher PER of 21.8x (from 20.6x, +1SD) to its CY15 EPS of 17 sen, which is in line with its +1.5 SD over 3-year historical forward mean PER. We reckon that the higher valuation can be justified by the steady earnings growth and the more resilient nature of its business as compared to other F&B peers.

Risks to Our Call Volatility of CPO prices

 Global economic and climatic uncertainties.

Source: Kenanga