INVESTMENT HIGHLIGHTS

• 1QFY20 earnings rose by +15.3%yoy premised on the strong growth of the MPM segment

• This, however, was subdued by the poor performance from the ILF and POA segment

• MPM segment will remain as the main earnings growth driver for the group

• Maintain NEUTRAL with a revised TP of RM7.46

1QFY20 earnings within expectations. QL Resources Berhad (QL)’s 1QFY20 earnings came in at RM50.6m (+15.3%yoy), which met ours and consensus expectations, both accounting for 20.1% and 20.3% of full year FY19 earnings forecasts respectively. Historically, the first quarter (i.e. April to June) accounts for about 21.0% of full year earnings. The strong 1QFY20 earnings was mainly driven by the solid performance of the Marine Product Manufacturing (MPM) segment.

MPM segment continue strong upward earnings trajectory. QL’s largest earnings contributor, the MPM segment, continues to record strong performance. The 1QFY20 revenue rose by +30.1%yoy to RM282.7m. Coupled with PBT margin of 16.6%, the PBT rose by +52.4%yoy to RM47.0m. The strong performance was mainly due to the: (i) higher sales volume of fishmeal and surimi-based products and; (iiii) weaker Ringgit against USD at an average of RM4.13/USD (vs 1QFY18 of RM4.04/USD).

However, ILF and POA segment’ recorded a lower PBT. However, the solid performance MPM segment was partially dragged by a lower PBT contribution from Integrated Livestock Farming (ILF) segment and Palm Oil Activities (POA) segment. The ILF segment’s 1QFY20 earnings declined by -19.4%yoy due to the: (i) lower margin from feed raw material trade and; (ii) lower contribution from regional poultry operations. Meanwhile, POA segment’s PBT contribution has dropped by -63.2%yoy to RM1.0m due to the dropped in CPO price by -17.0%yoy to RM1,964.0 per metric tonne.

Impact to earnings. We maintain our FY20 and FY21 earnings forecasts at this juncture.

Target Price. We are revising our target price to RM7.46 per share (previously RM7.06) as we rolled forward our valuation based year to FY21. The target price is derived based on DCF valuation with the assumption of terminal growth at 5.9% and WACC of 7.0%.

Maintain NEUTRAL. We believe that the MPM segment will remain as the main earnings growth driver for the group in the short to medium term due to the: (i) strong demand of the product; (ii) ramp-up of production and; (iii) weaker Ringgit. Additionally, the segment’s margin is the highest among QL’s three operating segments and hence, its strong growth will contribute positively to the group’s earnings. Over a longer term, we expect that expansion of FamilyMart operation will be EBITDA-positive in FY20. On the contrary, we expect the group’s overall earnings growth will be partially impacted by the volatile performance of ILF and Palm Oil Activities (POA) segments. Hence, we are recommending a Neutral stance on QL as current valuation at PE of about 52.0x is lofty as we believe that the diversification benefit has been priced in and the potential upside is limited in the near term.

Source: MIDF Research - 29 Aug 2019