KEY INVESTMENT HIGHLIGHTS

• 2QFY20 earnings came in at RM69.7m (+15.1%yoy) which is within our and consensus’ expectations

• Marine product segment continue strong upward earnings trajectory with +36.4%yoy growth

• Meanwhile, marginally improved performance recorded by the livestock farming and palm oil segment

• Maintain NEUTRAL with an unchanged TP of RM7.46

2QFY20 earnings within expectations. QL Resources Berhad (QL)’s 2QFY20 earnings came in at RM69.7m (+15.1%yoy). This brings its 1HFY20 earnings to RM120.2m (+15.2%yoy), which met ours and consensus expectations, both accounting for 47.8% and 48.4% of full year FY20 earnings forecasts respectively. The stronger 2QFY20 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 earnings performance. 2QFY20 revenue rose by +19.1%yoy to RM317.6m while PBT growth was even stronger at +36.4%yoy to RM53.3m. The strong performance was mainly due to: (i) higher sales volume of fishmeal and surimi-based products and; (ii) weaker Ringgit against USD at an average of RM4.19/USD (vs 2QFY19 of RM4.14/USD).

Marginally better performance from ILF and POA segment. During the quarter, Integrated Livestock Farming (ILF) segment and Palm Oil Activities (POA) segment registered a slightly improved performance compared to 2QFY19. The ILF segment’s 2QFY20 earnings grew by +2.3%yoy due to the higher sales contribution from: (i) Indonesia and Sabah poultry operation; (ii) feed raw material trade and; (iii) Family Mart operation. Meanwhile, THE POA segment was profitable in the 2QFY20 as compared to the loss of -RM1.6m recorded in the last corresponding quarter. The improved performance of POA segment was driven by: (i) better extraction rate and; (ii) foreign exchange gain.

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

Target Price. Our target price remains unchanged at RM7.46 per share. 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. On the contrary, we expect the group’s overall earnings growth will be partially impacted by the volatile performance of ILF. Over a longer term, we expect that expansion of FamilyMart operation will sustain group’s earnings trajectory. At this juncture, we view that the current PER valuation of approximately about 54x is lofty. We believe that the diversification benefit has been priced in and the potential upside is limited in the near term. Hence, we are maintaining our NEUTRAL stance on QL.

Source: MIDF Research - 2 Dec 2019