• Maintain NEUTRAL, new TP of MYR5.81 from MYR5.60, 0% upside. QL Resources’ 9MFY23 (Mar) 9MFY23 results beat expectations, as the integrated livestock farming (ILF) division continued to perform strongly. Notwithstanding the slower earnings momentum in 4QFY23F on seasonal factors, we believe QL’s solid fundamentals and continuous capacity expansion of its scalable business should underpin long-term growth sustainability. Such defensive attributes should continue to support the rich valuation, in our view.

• QL’s 9MFY23 results are above expectations. Net profit of MYR274m (+85% YoY) accounted for 83-84% of our and consensus forecasts. The positive deviation could be attributed to the stronger-than-expected ILF margin. Post-results, we raise FY23-35F earnings by 3-4%. Correspondingly, our SOP-derived TP rises to MYR5.81 (inclusive of a 2% ESG premium), which implies 41x P/E FY23F or is close to the stock’s 5- year mean.

• Results review. YoY, 9MFY23 revenue jumped 24% to MYR4.8bn, driven by healthy growth across all key operating divisions on the back of the recovery in consumption. ILF (+29%) was the biggest contributor to topline growth, thanks to higher volume and ASPs, which were a reflection of the sharp hike in feed costs. Meanwhile, 9MFY23 PBT surged 61% YoY to MYR368m again, spurred by the significant recovery in the ILF business and anchored by the steady marine product manufacturing unit (MPM, +28% YoY). QoQ, 3QFY23 revenue was flattish at MYR1.6bn but stronger margins in the poultry business – which benefited from the lower feed costs – propelled a record quarterly core net profit of MYR97m (+4% QoQ).

• Outlook. Following two spectacular quarters – boosted by robust performance in the MLM and ILF segments – we expect QL’s earnings growth momentum to taper off in the seasonally weaker 4QFY23F. The MPM division is expected to see softer demand on seasonality, whilst the ILF margin should soften – taking into consideration the rebound in commodity prices (and, as such, the steeper feed costs). Meanwhile, the weakness in the convenience store business may persist, given the lower footfalls. On top of that, operating costs should increase from 2023, taking into account the higher electricity and wage costs, in view of the hike in tariff rates and the new employment act.

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

Source: RHB Research - 1 Mar 2023