We reduce our FY23E and FY24E earnings by 6% and 1%, respectively, and trim TP by 2% to RM5.35. QL’s operations across the segments are returning to normalcy (including its convenience stores reverting back to growth trajectory after being temporarily disrupted by the pandemic) as economies come out the other end of the pandemic. However, rising input costs are weighing on its margins (especially, for the poultry business). Maintain MARKET PERFORM.

We come away from a recent engagement with QL feeling a little cautious on its near-term prospects. The key takeaways are as follows:

1. For its Family Mart (FM) franchise, QL is on track to add another 60 outlets in FY23. Currently, it has 303 outlets in operation (from 280 as at end-FY22). The opening of its second centralised kitchen in June 2022 paves the way for 300 new outlets in five years. In terms of average sales per store per day, we understand that the number is at RM8k vs. RM7k in FY22 and around RM5k-6k during the pandemic. For its vending machines or FM Mini, it plans to add another 300 locations in five years from 50 currently. FM Mini’s are typically placed at highway R&Rs, condos and petrol stations.

2. Meanwhile, for its marine products, there has been improvement in terms of demand (especially for surimi-based products due to production disruptions in India, Vietnam and Russia), and ASP hike (of about 10% as compared with FY22). These will help to partially mitigate higher wages.

3. It guided for a recovery in its poultry business in FY23 with government subsidies. It is now able to at least break even with an ASP of 45.0 sen/egg, which is at par with its average production cost. It expects its total production capacity (Malaysia, Indonesia and Vietnam) to rise to 6.8m eggs/day by end-FY23 from 6.3m currently, as its production capacity in Vietnam is expected to hit 1.8m eggs/day by end-FY23, which is a year earlier than previously planned.

4. QL is cautious on the outlook for its plantation and related businesses. Despite 1QFY23 typically seasonally stronger than the preceding quarter, FFB production may be impacted by heavy rainfall. Not helping either is the weaker prices. On the other hand, Boilermech may see better margins due to economies of scale. There is no change to its plan to eventually dispose its upstream plantation business (in line with its ESG strategy) while keeping Boilermech. However, it has yet to identify potential buyers for the asset.

Inflation the new challenge, after the pandemic. QL’s operations across the segments are returning to normalcy (including its FM franchise reverting back to growth trajectory after being temporarily disrupted by the pandemic) as economies come out the other end of the pandemic. However, rising input costs are weighing on its margins (especially, for the poultry business).

Earnings forecasts and recommendation. We revise down our FY23-24E earnings forecasts by 6-1%, largely to reflect the cost pressures as mentioned. We lower our DCF-derived TP to RM5.35 (from RM5.45) based on a WACC of 5.3% and TG of 2%. There is no adjustment to TP based on ESG of which it is given a 3-star rating as appraised by us. Maintain MARKET PERFORM.

Risks to our call include: (i) unreasonable ceiling prices imposed by the government on poultry products (in the absence of corresponding government subsidies), (ii) movement restrictions or lockdowns that affect the footfall at convenient stores, and (iii) change in fishing regulations.

Source: Kenanga Research - 27 Jul 2022