2QFY16 results were in line with expectations. Maintain NEUTRAL and P/E-based TP of MYR4.10 (from MYR3.64, -1.4% downside) after we roll over our P/E valuation to CY16. Despite QL’s excellent execution and sustainable growth driven by its MPM segment, we believe current valuations are fairly priced at this juncture at 20x CY16F EPS, or its 3-year historical mean.

In line as MPM props up remaining segments. QL Resources’ (QL) 2QFY16 net profit of MYR54.8m (+34% QoQ, +14% YoY), brought 1HFY16 net profit to MYR95.8m (+8.2% YoY). We deem the results in line at 47% and 44% of both our and consensus earnings estimates as 2HFY16 is the seasonally stronger half, typically accounting for 52%. For the quarter, the weaker MYR was the common underlying theme as it impacted the various segments with mixed results but largely positive with revenue growing 5.4% YoY. The marine product manufacturing’s (MPM) export oriented sales boosted segment growth to 20.4% YoY. Meanwhile, a drop in international feed raw material prices mitigated unfavourable forex impact as livestock farming (ILF) came in flat at +1.3% YoY despite registering higher volume. Lastly, palm oil activities (POA) experienced a double whammy with lower CPO prices and lower FFB processed resulting in revenue contracting -7% YoY.

Operating margins improve. Overall EBIT margin improved by a full 1ppt to 9.6% (2QFY15: 8.6%), largely attributed to the favorable forex movement given export sales in the MPM segment. Notably, ILF margin was down 0.4ppts at 6.0% (2QFY15: 6.4%) although poultry farm produce prices were lower for the quarter. EBIT growth outpaced earnings resulting in a small net profit margin improvement of 0.4ppts despite a higher effective tax rate.

Forecasts and risks. We leave our earnings forecasts unchanged as the results were within our estimates. Key risks include: i) volatile commodities prices, ii) further weakening of MYR, and iii) potential disease outbreak at its aquaculture farming and poultry operations.

Maintain NEUTRAL. Maintain NEUTRAL with a higher MYR4.10 TP (from MYR3.64) after we roll over our P/E valuation to CY16 with a target P/E of 20x or its 3-year historical mean. Our secondary valuation using DCF implies a valuation of MYR3.60. While we like QL for: i) its excellent execution and ii) sustainable growth driven by its MPM segment, we believe current valuations are fairly priced at this juncture.

Financial Exhibits

SWOT Analysis

Company Profile

QL Resources is mainly involved in marine processing, palm oil activities and livestock farming.

Recommendation Chart

Source: RHB Research - 23 Nov 2015