QL  Resources  (QL)’s 1QFY14  results  were  within  our  and  consensus forecasts.  We  deem  the  results  in  line  as  1Q  is  typically  the  weakest quarter.  Revenue  and  earnings  grew  by  17.2%  and  11.1%  y-o-y respectively,  thanks  to  strong  performance  at  its  MPM  unit.  In  view  of MPM’s aggressive expansion and firmer margins expected from ILF, we maintain our BUY call, with a higher FV of MYR4.20 (from MYR3.84).  
 
- In line. 1Q14 revenue climbed 17.2% y-o-y, mainly on higher sales from the  marine  product  manufacturing  (MPM)  (+6.2%  y-o-y),  palm  oil activities  (POA)  (+6.4%  y-o-y)  and  integrated  livestock  farming  (ILF) (+25.4%  y-o-y)  divisions.  ILF  sales  recorded  encouraging  revenue growth due to higher farm produce prices, unit value and volume of feed raw materials. Net profit expanded by 11.1% y-o-y, as MPM’s 47.5% y-o-y PBT growth offset negative PBT growth from POA (-119.2% y-o-y) and ILF (-9.3% y-o-y). The poor earnings from POA were due to softer crude palm  oil  (CPO)  prices  (MYR2,245  vs  MYR3,195  in  1Q13)  and  losses from  its  Indonesian  plantations,  while  ILF’s  lower  PBT  was  caused  by weaker  raw  material  trade  margins.  Compared  to  4Q13,  this quarter’s sales  and  net  profit  increased  by  2.9%  and  8.7%  respectively,  largely supported by MPM.  

- Expecting  better  margins  ahead.  EBITDA  and  PBT  margins  trended lower by 70bps and 90bps y-o-y respectively, mainly due to weaker PBT margins  from  ILF  (5.4%  vs 1Q13’s  7.4%)  and  POA  (-0.8%  vs  1Q13’s 4.6%).  ILF’s  lower  margin  was  the  result  of  normalising  margin  from  its poultry  operation  in  East  Malaysia,  which  dropped  to  2  sen/egg  from  4 sen/egg  following  a  recovery  in  the  egg  supply  shortage.  We  believe ILF’s  margin  will  tick  up  in  the  remaining  quarters  on  the  back  of stabilising  raw  material  costs  and  the  recent  recovery  in  egg  prices  in Peninsular Malaysia and Indonesia from a loss to 1-2 sen/egg.

- Risk.  Key  risks  include  volatile  commodity  prices  and  potential  animal diseases disrupting poultry operations.

- Maintain  BUY.  We  keep  our  forecasts  but  roll  over  our  valuation  to CY14  (from  FY14),  deriving  a  higher  FV  of  MYR4.20  (from  MYR3.84), based  on  an  unchanged  P/E  of  19x.  Maintain  BUY,  as  we  continue  to like QL’s regional expansion strategy and sound business model.

Source: RHB