INVESTMENT HIGHLIGHTS

• 2QFY18 earnings rose by +18.4%yoy to RM59.8m

• Better earnings recorded for ILF and POA segment

• MPM segment recorded lacklustre performance

• Marine product manufacturing on a declining trend

• Reaffirm NEUTRAL stance with an unchanged TP of RM4.13

Within expectations. QL’s 2QFY18 earnings came in at RM59.8m. This brings the cumulative 6MFY18 earnings to RM102.0m which is within our expectations but lagged consensus’ estimates, accounting for 46.0% and 41.0% of our and consensus’ full year FY18 earnings forecasts respectively. Against last year, revenue and earnings rose by +10.9% and +18.4% respectively while revenue and earnings rose by +3.9% and +41.7% respectively on a quarterly sequential basis. The stronger 2QFY18 performance was due to the: (i) recovery in earnings of the integrated livestock farming (ILF) segment and; (ii) better performance of the palm oil activities (POA) segment against FY17. Nevertheless, the stronger performance of ILF and POA segments were mitigated by the lacklustre performance of the marine product manufacturing (MPM) segment.

Better earnings recorded for ILF and POA segment. The ILF’s 2QFY18 revenue and PBT increased by a significant +16.0%yoy and +14.0%yoy respectively. The improved PBT was due to the higher contribution from Indonesia and East Malaysia Poultry units in the current quarter. Meanwhile, POA’s 2QFY18 revenue and PBT increased by a significant +13.8%yoy and +44.1%yoy respectively. The improved performance was due to the higher FFB production and processed as well as higher CPO prices which was at RM2,650 per metric tonne in 2QFY18 in comparison to RM2,507 in the previous corresponding quarter.

MPM segment recorded lacklustre performance. MPM’s 2QFY18 revenue decreased marginally by -0.4%yoy. Consequently, PBT for the segment decreased by -13.5%yoy. This represents a PBT margin of 14.6%, a decline of -2.2ppts 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.

Prospect. We believe that QL will continue to report satisfactory performance in the 2HFY18 due to: (i) the recovery of the ILF segment driven by strengthening of Ringgit which will reduce the cost of animal feed raw material and; (ii) seasonally stronger Q3 as the weather condition in the Q3 is historically favourable to the MPM and POA segments.

Impact to earnings. Post earnings announcement, we maintain our FY18F and FY19F as the result is in line with our expectations.

Reaffirm NEUTRAL stance with an unchanged TP of RM4.13. We are maintaining our NEUTRAL call on QL with an unchanged TP of RM4.13 per share. Our target price is based on a PER19 and EPS19 of 26.00x and 15.9sen respectively. The PER is based on the historical average PER in the past three years from 2014.

Source: MIDF Research - 28 Nov 2017