• Maintain NEUTRAL, new TP of MYR4.92 from MYR4.67, 2% downside with c.1% FY23F (Mar) yield. QL Resources’ FY22 results beat expectations, following a sharp turnaround in its integrated livestock farming (ILF) earnings. We believe QL will be able to resume its earnings growth trajectory following the broader reopening of the economy, on the back of better containment of COVID-19 infections – thanks to its strong market position and diversified business model. That said, the rich valuation may have reflected its solid fundamentals and defensive attributes.

• FY22 results are above expectations. Core net profit of MYR217m (-7% YoY) accounted for 103-108% of our and consensus forecasts, on the stronger-than-expected recovery in its ILF division. Post-results, we raise FY23-24F earnings by 4-7%, and take the opportunity to introduce our FY25 forecast (+8%). Correspondingly, our SOP-derived TP rises to MYR4.92, (inclusive of a 2% ESG premium), which implies 44x P/E FY23F – in line with the stock’s 5-year mean.

• Results review. YoY, FY22 sales jumped 20% to MYR5.2bn, thanks to higher contributions from the ILF and convenience store chain (CVS) businesses, and the consolidation of a new subsidiary’s revenue (Boilermech). Notably, the marine product manufacturing (MPM) division saw a sales decline of 7%, dragged by a lower fish catch and labour constraints. FY22 PBT fell 26% YoY, as all of the operating divisions recorded lower contributions save CVS, which benefited from the recovery in footfall and the expansion of its store network. 4QFY22 sales inched down by 2% QoQ to MYR1.4bn, mainly due to the seasonal softness in MPM. This caused 4QFY22 PBT to dip 4% YoY, despite ILF staging a sharp rebound after capitalising on the price recovery in both the Malaysia and Vietnam markets. That said, QL’s 4QFY22 core net profit grew 16% QoQ to MYR69.4m, following the normalisation of its effective tax rate.

• We expect FY23 earnings to surge by 25% YoY, as we expect most of its business units to benefit from the broader economic reopening, on the back of better containment of COVID-19 cases. MPM should see better export volume and the easing of labour constraints and freight challenges, while ILF may benefit from the recovery in consumption and higher product ASPS across its markets. Meanwhile, its CVS business should continue to grow, driven by outlet expansion from its current network of 290 stores and an improved customer footfall. QL remains positive on the scalability of the CVS brand, and targets to grow its FamilyMart network to 600 stores in the next five years.

• Downside risks to our recommendation include the prolonged lockdown in operating countries and a sharp hike in commodity prices. The reverse of these circumstances would present upside risks.

Source: RHB Research - 31 May 2022