9MFY22 earnings came in below expectations on account of persistent high feed costs and depressed egg selling price. On a positive note, PBT margins from the MPM and POCE segments remained stable in this reporting quarter as economic activities reopened. Moving forward, soft PBT margins from the IFL segment are likely to persist into the next financial year but likely offset by improved contribution from Family Mart. TP is lowered to RM5.05 and call downgraded to MARKET PERFORM.

Below expectations. 9MFY22 PATAMI of RM148m fell short of expectations accounting for 58%/68% of our/market estimates as persistently high feed costs and depressed egg selling price eroded earnings in the IFL segment coupled with additional Covid-19 compliance costs. No dividend declared as expected which is normally declared in the final quarter.

YoY, revenue continued to show a healthy growth with a +23% uptick to RM3.87b. Earnings continued to be eroded on still elevated input costs coming from both the MPM and ILF segments with PBT falling by 25% and 50%, respectively. Top-line was underpinned by improvements in POCE (+175% to RM469.9m) and ILF (+24% to RM2.52b). The former was boosted by the full inclusion of BoilerMech and significant improvement in CPO selling prices. IFL was boosted by contribution from FamilyMart coupled with increased egg production and high feed trading prices. MPM sales declined 8% due to disruption in fishing activities caused by shortage of foreign fishing crew. PBT fell 20% to RM228.4m mitigated by strong showing from POCE.

QoQ, with 3Q is historically a strong one for QL, revenue improved by 12% to RM1.40b underpinned by double-digit growth from MPM (+16%) and POCE (+48%) with the latter underpinned by project delivery resumption at BoilerMech and the former coming from higher selling prices and strong performance from surimi-based products. As group earnings saw broad based growth, PBT saw higher uptick (+37%) with PBT margin ending at 7%, underpinned by stable PBT margins coming from both MPM and POCE.

Historically, 4Q is a weaker quarter compared to 3Q but we expect revenue to remain robust coming from the MPM and POCE segments coupled with fishing crew returning for the MPM segment. MPM activities are historically lower in the 4Q of the financial year (due to monsoon) but we expect improvements ahead provided no further extreme resurgence due to the pandemic. The consolidation of Boilermech, should solidify POCE even as CPO prices softens. Meanwhile, we expect FamilyMart to see strong improvements ahead, mainly underpinned by normalising retail footfalls with the easing of restrictions.

Post results, our FY22E/FY23E earnings are slashed by ~15%/20% to RM216m/RM269m on account of poor margins from the IFL segment.

Downgrade to MARKET PERFORM with a lower TP of RM5.05 pegged to a FY23E PER of 45.9x in line with its 5-year mean which we feel is justified given its historical resiliency and robust earnings coupled with exciting growth potential from diversified revenue streams.

Risk to our call: worse-than-expected MPM sales.

Source: Kenanga Research - 25 Feb 2022