1Q17 core earnings of RM42.1m (+3%) was within both our (20%) and market (18%) expectations as 1Q is normally the seasonally weakest quarter. No DPS was declared as expected. No changes made to our earnings forecasts. Moving forward, we expect Marine Product Manufacturing (MPM) division to support the earnings growth. Target Price maintained at RM4.16 and we maintain UNDERPERFORM on rich valuations as we think the positives might have been fully priced in.

Results within expectations. 1Q17 core net profit of RM42.1m (+2.9%) matched 20% of our full-year forecast and 18% of the consensus’ estimate. As 1Q is seasonally the weakest quarter for QL, we deemed the result as within expectations. No dividend was declared, as expected.

YoY, 1Q17 revenue inched up marginally by 2.2% to RM669.5m driven by solid performance in MPM (+15.6%) on the back of robust demand on surimi-based products. Meanwhile, 1Q17 PBT of RM52.8m was little changed (+0.0%) as the better farm prices in Integrated Livestock Farming (ILF) division propelled the segmental PBT up by 16.2% to RM15.2m, which offset the weakness in MPM (-3.9%) due to the lower consumption in the domestic market. However, 1Q17 net profit managed to record growth of 2.9% to RM42.1m thanks to lower effective tax rate of 20.2% (vs 1Q16:22.5%)

QoQ, 1Q17 revenue of RM669.5m declined 12.9% mainly dragged down by the downfall in ILF (-25.3%) on lower traded volume of feedstock caused by late shipment arrival in South America due to bad weather. Meanwhile, 1Q17 PBT climbed 6.8% to RM52.8m driven by strong performance in ILF (+11.0%) on the back of better farm prices and recovery in Palm Oil Activities (POA) division (+153%) due to improvement in FFB processed and higher average CPO prices (+8.2%). As a result, 1Q17 net profit was 10.6% higher as compared to 4Q16, further aided by a lower effective tax rate of 20.2% (vs 4Q16: 23.0%).

MPM to anchor growth. Looking forward, we are forecasting healthy earnings growth of 10.5%-8.2% in the next two years, mainly underpinned by the resilient MPM division. We expect ILF to normalize gradually with more favourable farming conditions while Palm Oil Activities (POA) division will stay subdued with CPO price not expected to strengthen substantially. Earnings growth on QoQ basis should kick in stronger on seasonality and normalization in shipment deliveries.

Earnings unchanged. We made no changes to our earnings forecasts.

Maintain UNDERPERFORM with unchanged Target Price of RM4.16. Our TP is unchanged at RM4.16 based on unchanged 23.1x PER CY17E, which is on par with +0.5 SD over its 5-year mean. We favour the Group for its proven earnings track record and strong fundamentals to sustain earnings growth, but we think the valuation is rich (trading at 24.2x PER CY18E, above +1 SD over 5-year mean) while the dividend pay-out ratio is also less rewarding (30% of earnings, yield at <1.5%) compared to other large-cap staple food companies under our coverage where none of them are ascribed valuation higher than +0.5 SD over mean. As such, we think that the risk-to-reward consideration is less than compelling at this juncture as the positives might have been fully priced in.

Source: Kenanga Research - 25 Aug 2016