Fair Value : RM3.60 | Recom : Outperform (Maintained)

Expecting 2QFY03/13 results to improve yoy. QL Resources (QL) will be releasing its 2QFY03/13 results on 20 Nov 2012. We expect QL to report higher 2QFY03/13 earnings (+8-10% yoy) driven by: (i) better performance from its marine products manufacturing (MPM); and (ii) increased contribution from its integrated livestock farming (ILF) operations in Indonesia. We expect QL’s 1HFY03/13 net profit to account for 45-47% of our FY03/13 annual forecast, as its second half of financial year tends to be stronger historically.

MPM to be the key driver of QL’s 2QFY03/13 results. We believe its MPM division would be the key driver of QL’s 2QFY03/13 results with improved fish landing. As such, we forecast its MPM division’s PBT margin to improve to 14-16% (from 13.7% in 2QFY03/12) in tandem with better fish landing. Nevertheless, the MPM division’s quarterly PBT margin can be rather volatile depending on the number and quality of fish landings.

QL’s ILF and palm oil activities (POA) divisions’ performance will be more subdued. Its ILF division’s performance would be a mixed bag with credible performance from its East Malaysian and Indonesian operations, but its Peninsula Malaysian operations would likely to be hit by weak average selling price of eggs (oversupply of eggs during the quarter) and high feedmeal costs. However, QL’s feedmeal trading business would partially cushion the high feedmeal costs. Its POA division would likely report weaker results with lower crude palm oil (CPO) average selling price but partially offset by higher FFB production during the quarter.

Forecasts. We leave our forecasts largely unchanged.

Risks. Investment risks include: 1) weaker consumer demand; 2) sharp increase in raw material costs; 3) volatility in CPO selling prices; 4) foreign exchange risk; and 5) expansion plans which may strain its balance sheet.

Reiterate Outperform. We maintain our Outperform call on QL with an unchanged fair value of RM3.60 based on target PER of 17x of its CY13 earnings (pegged to 3-year average traded PER). Currently, QL is trading at 15.3x of its CY13 earnings, lower than the average traded PER of 18- 20x range of local large-cap consumer stocks. We like QL for its defensive earnings from consumer staples such as fish-based and poultry products as well as its strong execution track record. We are positive on QL’s ability to replicate its success in Indonesia and its performance to date in Indonesia has been encouraging.

Source: RHB Research - 19 Nov 2012