KEY INVESTMENT HIGHLIGHTS

• 1HFY21 earnings of RM121.0m below expectation

• 2QFY21 net profit grew by 0.7%yoy to RM126.7m as revenue was up marginally by 0.5%yoy to RM2.05b

• MPM division is likely to support growth

• Earnings for FY21F/FY22F revised by -12.3%/-7.4%

• Maintain NEUTRAL with an adjusted TP of RM5.89

1HFY21 earnings of RM121.0m below expectation. QL Resources Berhad’s (QL) 1HFY21 net profit made up 40.8% of ours and 44.8% of consensus’ full year estimates. No dividend was announced during the quarter, which is within expectation.

2QFY21 net profit grew by 0.7%yoy to RM70.1m as revenue was up marginally by 0.5%yoy to RM1.08b. The improvement was mainly driven by the marine product manufacturing (MPM) pre-tax profit which jumped by 38%yoy to RM73.6m as revenue for the division rose by 6%yoy to RM337.3m. This was attributed to higher sales and improved margin due to higher volume and better cost efficiency for surimi and surimi based products. Improving fishmeal and aquaculture margin has also lifted earnings. On the other hand, palm oil activities (POA) division recorded a loss of RM1.6m from a profit of RM0.8m a year ago although revenue increased by 14%yoy to RM57.6m. The higher sales was due to higher crude palm oil price of RM2,500 per tonne compared to RM1,900 per tonne a year ago. However, the division slipped into losses due to the weakening of Indonesian Rupiah. Its integrated livestock farming (ILF) division pre-tax profit is lower by 16%yoy at RM25.3m as revenue dipped 3%yoy to RM683.1m due to lower raw material trading price and weaker farm produce price in West Malaysia and Indonesia. Meanwhile, FamilyMart sales recovered during the quarter.

Sequentially, net profit surged 37.9%qoq driven by the turnaround in ILF and better MPM performance. MPM pre-tax profit increased by 19%qoq as revenue climbed 10%qoq due to seasonal factor and stronger demand for surimi products. Earnings for the division also improved due to better aquaculture contribution. POA division results were weaker compared to the preceding quarter mainly due to the big fluctuation in Indonesian rupiah and USD. ILF division saw PBT ballooned from RM4.0m to RM25.3m compared to 1QFY21 due to better farming operations as well as recovery in the performance of FamilyMart, which had been negatively impacted by the movement control order (MCO) in the previous quarter.

MPM division is likely to support growth. We expect the MPM division to remain its main profit contributor due to resilient demand as well as well its diversified markets. On the other hand, we expect sales for its POA division to remain positive given the strong CPO prices although foreign exchange fluctuation may affect its profit. We expect the ILF division to be slightly affected by the conditional MCO in the Klang Valley, which may adversely impact sales. That said, we think that the impact may not be as severe as seen in 1QFY21. We also note that pricing in poultry products may remain uncertain due to the spike in Covid-19 cases in Peninsular Malaysia recently, which may dampen demand. However, demand may recover towards end of the year with the festive and holiday season.

Earnings for FY21F/FY22F revised by -12.3%/-7.4%. The pandemic is expected to dampen its growth prospects in the near-term. Notably, we expect the ILF and the POA divisions to be more vulnerable to changes from the macroeconomic perspective.

Maintain NEUTRAL with an adjusted TP of RM5.89 (previously RM6.14). Our TP is adjusted following our revision in earnings estimates for FY21E and FY22F. Our DCF-derived TP is based on an unchanged terminal growth rate of 6.0% and WACC assumption of 7.0%. We expect robust demand for products under its three segments in the long run despite the near-term macro challenges caused by the pandemic. We expect subdue earnings growth in the near-term. Valuation is still rich at the moment, leaving limited capital upside. As such, we maintain our NEUTRAL recommendation on QL.

Source: MIDF Research - 30 Nov 2020