INVESTMENT HIGHLIGHTS

• 1QFY18 earnings rose +0.2%yoy to RM42.2m

• Margins declined on revenue growth

• Integrated livestock farming (ILF)’s earnings dropped

• Marine product manufacturing on a declining trend

• Palm oil activities (POA) continues upward trajectory

• Reaffirm NEUTRAL stance with a revised TP of RM5.37

Met our and consensus expectations. QL’s 1QFY18 earnings rose marginally by +0.2%yoy to RM42.2m accounting for 19.0% and 19.5% of our and consensus full year forecasts respectively. 1Q is historically the weakest quarter for the group.

Revenue grew but margins declined. The group’s 1QFY18 revenue grew by +16.3%yoy to RM778.5m mainly due to a stronger performance from Integrated Livestock Farming (ILF) and Palm Oil Activities (POA) segment. Nevertheless, the decline in operating profit and PATAMI margin by -1.4ppts and -0.9ppts yoy respectively reduced the growth in earnings. The lower margins are compensated by lower effective tax rate resulting with a marginal earnings growth of +0.2%yoy.

Marine product manufacturing (MPM) on a declining trend.

MPM’s 1QFY18 revenue decreased marginally by -0.2%yoy. However, PBT for the segment significantly decreased by -10.6%yoy. This represents a PBT margin of 14.6%, a decline of -1.7ppts yoy. The subdued performance of the MPM divisions was due to post El-Nino low fish cycle in Malaysia waters especially the Kota Kinabalu unit in comparison to the corresponding quarter.

Integrated livestock farming (ILF)’s earnings dropped. ILF’s 1QFY18 revenue increased by a significant +29.7%yoy. The segment’s PBT however, dropped by -19.0%yoy due a tighter margin of 2.7% (a drop of -1.4ppts yoy). The worsening in PBT was due to the stiff competition from feed raw material trade as well as the over production of egg in the Peninsular market and poor international prices.

Palm oil activities (POA) continue upward trajectory. POA’s 1QFY18 revenue increased significantly by +29.7%yoy. The segment’s PBT recorded a growth of RM4.2m against the corresponding quarter. The PBT margin recorded an increase of +2.9ppts to 5.8%. The significant increase in performance is due to the increase in own FFB production and FFB processed in Indonesia operation coupled with a higher CPO prices.

Prospect. We believe that QL will continue to report satisfactory performance in the 2HFY18 despite the subdued performance of the MPM and ILF segment as it is well mitigated by the recovery of POA segment in the near term.

Reaffirm NEUTRAL stance with a revised TP of RM5.37. We are maintaining our NEUTRAL call on QL whilst revising our valuation base year to FY19 with revised TP of RM5.37 per share (previously RM4.62). Our target price is based on a PER19 and EPS19 of 26.00x and 20.6sen respectively. The PER is based on the historical average PER in the past three years from 2014.

Source: MIDF Research - 25 Aug 2017