QL is unperturbed by the withdrawal of subsidy on eggs, if it happens, as the impact on demand will be minimal given eggs being a staple food item. Meanwhile, easing corn prices are positive to its poultry farming business. It plans to open 60 to 90 new Family Mart stores in FY25. We maintain our forecasts, TP and MARKET PERFORM rating.

We walked away from QL’s post-results briefing feeling mildly positive about its near-term prospects. The key takeaways are as follows:

1. QL is of the opinion that the government may review its current subsidy of 10 sen per egg and the controlled prices of 41 sen to 45 sen for eggs of Grades A to C. In the event the subsidy and price control are withdrawn (resulting in higher market-based egg prices), however, the impact on demand will be minimal as eggs are a staple food item for the general public.

2. Meanwhile, easing corn prices (-6% YTD) in the absence of oversupply of chicken in the market (that could dampen prices) should buoy the performance of its integrated livestock farming (ILF) segment. In FY24, the division contributed 53% to group turnover and saw its PBT margin improving to 6.5% vs. 5.3% a year ago.

3. Its marine product manufacturing (MPM) division is expected to remain stable due to sustainable demand for its surimi-based products. Additionally, the overall margin is anticipated to improve due to declining input costs.

4. Its Family Mart convenience store chain (CVS) will open 60 to 90 new stores during FY25. The division’s operating efficiency could be boosted by raising utilisation at its central kitchen, currently stands at 70, by offering more ready- to-eat food items without compromising on quality.

5. Its plantation & clean energy division (POCE) segment, meanwhile, will continue to be driven by 52.57%-owned BMGREEN (UP; TP: RM1.15) that focuses on higher-margin segments (>10%) such as water treatment and solar energy which benefit from various government renewable energy initiatives. Conversely, its plantation segment is likely to remain lacklustre on flattish CPO prices.

Outlook. QL's growth trajectory remains stable, supported by various segments. The ILF and MPM segments are expected to sustain earnings through steady demand, cost subsidies, and lower surimi input costs. Additionally, the POCE segment's focus on clean energy initiatives via BMGREEN will drive growth. Consumer confidence is expected to improve with the new civil servant wage structure. The group aims to open 60-90 new stores (in line with our 75 new store target) by the end of FY25, focusing on the East Coast region, and remains committed to the long-term target of 600 outlets by 2027.

Forecasts. Maintained.

Valuations. We also keep our DCF-derived TP at RM6.25 (WACC: 5.8% and TG: 2%). There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 4).

Investment case. We like QL for: (i) the consistent high export demand for its marine products, supported by robust fish landings and decreasing input costs, (ii) the high growth potential of its Family Mart convenience store franchise, highlighted by its popular Japanese-themed products and continued expansion, including the new Family Mart Mini outlets targeting petrol stations and highways, and (iii) it growing poultry business in Indonesia and Vietnam, driven by increasing protein consumption as living standards rise. However, its valuations are fair at the current levels. Maintain MARKET PERFORM.

Risks to our call include: (i) inability of pass on cost inflation, (ii) rough aggressive monsoon seasons, (iii) changes in fishing regulations, and (iv) MYR strengthening against the USD.

Source: Kenanga Research - 6 Jun 2024