INVESTMENT HIGHLIGHTS

• 3QFY18 earnings rose by +3.2%yoy to RM57.9m

• Strong earnings recorded for ILF segment

• Nevertheless, MPM and POA segment recorded uninspiring performance

• Reaffirm NEUTRAL stance with a revised TP of RM4.74

Within expectations. QL Resources Berhad (QL)’s 3QFY18 earnings came in at RM57.9m. This brings the cumulative 9MFY18 earnings to RM159.9m which came in within ours and consensus expectations, accounting for 72.1% and 73.9% of full year FY18 earnings forecasts respectively. Against last year, revenue and earnings rose by +11.6%yoy and +3.2%yoy respectively while on a quarterly sequential basis, revenue rose by +10.3% but earnings dropped by - 3.3%. The commendable 3QFY18 performance was due to the strong recorded earnings of the integrated livestock farming (ILF) segment but its solid performance is mitigated by the subdued earnings of the marine product manufacturing (MPM) segment.

Strong earnings recorded for ILF segment. The ILF’s 3QFY18 revenue and profit before tax (PBT) increased by +8.9%yoy and +46.9%yoy respectively. The improvement in PBT was mainly due to the: (i) higher contribution from Indonesia and East Malaysia’s poultry units and; (ii) lower cost of feed raw material mainly corn and soybean due to the strengthening of Ringgit. As a result, PBT margin improved to 5.4% from 4.0% recorded in the prior year corresponding quarter.

MPM and POA segments recorded uninspiring performance. MPM’s 3QFY18 PBT dropped by -14.4%yoy. The subdued performance of the MPM divisions was due to the post El-Nino low fish cycle in Malaysia waters especially the Kota Kinabalu unit. This led to a lower contribution from Surimi and fishmeal operation in comparison to the corresponding quarter. Meanwhile, the Palm Oil Activities (POA) segment’s 3QFY18 PBT dropped marginally -0.1%yoy. The stagnant performance was due to the: (i) lower CPO prices which was at RM2,592 per metric tonne in 3QFY18 in comparison to RM2,867 per metric tonne in the previous year corresponding quarter (a decline of - 10.6%yoy) and; (ii) lower oil extraction rate as a result of heavy rainfall.

Prospect. We believe that QL will continue to report satisfactory performance in the 4QFY18 mainly driven by the recovery of the ILF segment driven. This is pursuant to the strengthening of Ringgit which will reduce the cost of animal feed raw material. Nevertheless, the prolong low fish catch cycle will continue to affect MPM segment performance.

Impact to earnings. No change to our earnings estimates at this juncture.

Reaffirm NEUTRAL stance with a revised TP of RM4.74. We are maintaining our NEUTRAL call on QL with a revised TP of RM4.74 per share (previously RM4.13). Our target price is premised on a higher PER19 of 29.8x and EPS19 of 15.9sen. Note that we updated the group’s two year historical PER to 29.8x from 26.0x previously.

Source: MIDF Research - 27 Feb 2018