1H17 core net profit of RM92.6m (-4% YoY) is considered broadly within our expectation (44%) as we anticipate stronger 2H17 ahead. No DPS was declared as expected. There is also no change to our earnings forecasts. Moving forward, we expect Marine Product Manufacturing (MPM) division to support the earnings growth. QL is kept at UNDERPERFORM due to rich valuations with unchanged Target Price of RM4.16.

Results broadly within our expectation. 1H17 core net profit of RM92.6m (-3.6% YoY) matched 44% of our full-year forecast and 42% of the consensus’ estimate. We consider the result as broadly within our expectation as we expect stronger 2H17 ahead on seasonality as well as the strengthening of USD. No dividend was declared, as expected.

YoY, 1H17 revenue inched up by 4.0% to RM1.4b mainly driven by the steady sales in MPM (+10.3%) on the back of robust demand for its fishery products. Meanwhile, 1H17 PBT was unchanged at RM123.5m as the lower contribution by MPM (-6.3%) on the back of lower margin (17.1% vs 1H16: 20.1%) which was dragged down by unfavourable forex and lower fish catch was offset by the recovery in Integrated Livestock Farming (ILF) (+16.8%) thanks to better farm produced prices. 1H17 net profit was 3.6% lower at RM92.6m as compared to RM96.1m mainly due to the higher minority share of RM4.5m (vs 1H16: RM0.5m) as its Indonesian subsidiary recorded higher profit contribution.

QoQ, 2Q17 revenue grew 9.0% to RM729.7m owing to the strong recovery in ILF (+21.5%) thanks to the higher contribution from its Indonesian feed mill unit while contribution from MPM was marginally higher (+1.4%). Meanwhile, 2Q17 PBT jumped 33.9% to RM70.7m driven by growth across all three operating divisions with ILF contribution surging 88.8% to RM28.6m thanks to better farm produce prices. PBT contribution from MPM also registered a growth of 11.7% with segmental margin expanding 1.6ppt to 17.9% accentuated by the low base in 1Q17 on seasonality. As a result, 2Q17 net profit grew 19.9% to RM50.5m.

MPM to stay resilient. 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 as well as the strengthening of USD, which will benefit MPM.

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. Although we like the Group for its proven earnings track record and strong fundamentals to sustain earnings growth, we think the valuation is rich (trading at 24.3x PER CY17E, above +1 SD over 5-year mean). Meanwhile, dividend pay-out ratio is 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 - 22 Nov 2016