INVESTMENT HIGHLIGHTS

• 4QFY18 earnings decreased by -1.8%yoy, impacted by underperformance from MPM and POA segments

• Slight improvement seen from the ILF segment

• 4.5sen dividend announced for FY18

• Prolong low fish catch cycle to further impact MPM segment

• Downgrade to SELL with a revised TP of RM4.71

Earnings lagged our expectation. QL Resources Berhad (QL)’s 4QFY18 earnings came in at RM46.4m. Against last year, 4QFY18 revenue and earnings dropped by -3.6%yoy and -1.8%yoy respectively while on quarterly sequential basis, revenue and earnings declined by -12.1% and -1.8% respectively. The weak 4QFY18 performance was due to the continued poor performance of Marine Product Manufacturing (MPM) segment. Cumulatively, full year FY18 earnings amounted to RM206.2m (+5.3%yoy) which lagged ours but within consensus expectations, accounting for 93.1% and 96.7% of full year FY18 earnings forecasts respectively.

MPM segment impacted by low fish catch cyle. The segment’s 4QFY18 Profit before tax (PBT) dropped by -17.7%yoy, which brought its losing streak to eight consecutive quarters. The weakness of the MPM segment was due to post El-Nino low fish cycle in Malaysia waters especially the Kota Kinabalu unit. As fish accounts of approximately 60% of the cost of producing surimi, a disruption in fish supply will translate into a lower margin for the segment. This is as QL has to source its fish supply elsewhere at a higher price.

ILF segment revenue dropped. QL’s biggest revenue contributor, the Integrated Livestock Farming (ILF) segment’s 4QFY18 revenue declined by -1.7%yoy mainly due to the lower volume of animal feed traded. Nevertheless, due to the better performance of poultry farms operation from Indonesia and East Malaysia’s poultry units, PBT for the segment recorded higher by +2.6%yoy. This is as the poultry unit PBT margins is higher than the animal feed trading unit by +2.0ppts to +5%ppts.

Dividend proposed. The company propose a final single tier dividend of 4.50sen per share in respect of FY18 subject to the approval of the shareholders at the forthcoming general meeting.

Impact to earnings. We are revising FY19 earnings forecasts downwards to RM246.2m as we are assuming a more conservative performance from the MPM segment.

Prospect. We believe that the MPM segment will remain suppressed by the prolong low fish catch cycle. While the overall group performance will continue to be lifted by the good performance of ILF segment, the segment’s margin is the lowest among QL’s three operating segments. Hence, its marginal growth does not contribute as much to the group’s earnings.

Downgrade to SELL. We are downgrading our call to SELL (previously NEUTRAL) on QL with a revised TP of RM4.71 (previously RM4.74). Our target price is premised on a PER19 of 29.8x and EPS19 of 15.8sen. The PER is based on the group’s two year historical PER.

Source: MIDF Research - 25 May 2018