KEY INVESTMENT HIGHLIGHTS

• 3QFY20 earnings came in at RM76.1m (+10.1%yoy) which was within our and consensus’ expectations

• Integrated livestock farming segment recorded strong upward earnings trajectory with +25.4%yoy growth

• Meanwhile, commendable performance recorded by the marine product manufacturing segment

• Maintain NEUTRAL with an unchanged TP of RM7.46

3QFY20 earnings within expectations. QL Resources Berhad (QL)’s 3QFY20 earnings came in at RM76.1m (+10.1%yoy). This brings its 9MFY20 earnings to RM196.4m (+13.2%yoy), which met ours and consensus expectations, both accounting for 78.1% and 78.0% of full year FY20 earnings forecasts respectively. The stronger 3QFY20 earnings was mainly driven by the solid performance of the Integrated Livestock Farming (ILF) segment.

ILF segment registered strong earnings. QL’s largest revenue contributor, the ILF segment, continued recording strong revenue and earnings performance. 3QFY20 revenue rose by +19.2%yoy to RM749.9m while PBT growth was even stronger at +25.4%yoy to RM40.8m. The strong performance was mainly due to the: (i) higher sales from the FamilyMart business (ii) better performance from the regional and Sabah poultry operation; and (iii) improved margins on feed raw material trade.

MPM segment recorded a commendable earnings trajectory. During the quarter, Marine Product Manufacturing (MPM) segment registered an improved performance compared to 3QFY19. The MPM segment’s 3QFY20 earnings grew by +3.7%yoy attributable to the: (i) higher sales volume of fishmeal and surimi-based products and; (ii) weaker Ringgit against USD. Meanwhile, despite the improvement in CPO price, POA segment drop significantly by -63.5%yoy to RM3.2m. The weak performance of POA segment was caused by the: (i) lower FFB processed and; (ii) lower average CPO price.

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. Despite the improved performance of ILF segment during the quarter, 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 sustain group’s earnings trajectory. At this juncture, we view that the current PER valuation of more than 50.0x 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 - 28 Feb 2020