• Upgrade to BUY from Neutral, TP rises to MYR6.12 from MYR5.64, 13% upside with 1% FY24F (Mar) yield. QL Resources’ 1QFY24 earnings beat expectations. We turn positive on the stock, in view of its more palatable valuation along with the company’s accelerating earnings growth ahead. Against the backdrop of soft consumer sentiment and slower global growth, we believe QL Resources will be able to outperform its consumer peers by offering better earnings visibility, thanks to its diversified business model and the resilient demand for its products.

• 1QFY24 results outperformed estimates. Net profit of MYR93m (+13% YoY) accounts for 24% and 27% of our and Street’s full-year estimates (5- year historical average: 21%). The positive deviation could be attributed to stronger-than-expected numbers from its marine product manufacturing (MPM) and integrated livestock farming (ILF) divisions. Post results, we raise our FY24-26F earnings by 10-13%, as our previous margin assumptions were too conservative. Correspondingly, our SOP-derived TP is revised to MYR6.12 (inclusive of a 2% ESG premium), which implies 40x FY24F P/E, ie slightly below the stock’s 5-year mean.

• Results review. YoY, 1QFY24 revenue rose 5% to MYR1.6bn, mainly driven by robust MPM sales and the continuous expansion of its convenience store (CVS) network. Meanwhile, 1QFY24 PBT surged 26% to MYR136m again, underpinned by the strong contribution from the MPM division – which in turned saw better fish catch and higher demand for fishmeal – whilst ILF also booked wider margins on the back of a more favourable sales mix and government subsidy. QoQ, 1QFY24 revenue was 9% higher on better seasonality of the MPM business, further aided by the recovery in the Indonesia poultry market and a better showing from the CVS wing. Correspondingly, 1QFY24 PBT jumped by 21% QoQ.

• Outlook. Earnings momentum should accelerate further in the upcoming quarters, in view of the stronger seasonality of the MPM business and easing input costs. In addition, the improving market conditions in Indonesia and positive traction in Malaysia should continue to sustain the elevated ILF earnings base. Meanwhile, its palm oil and clean energy or POCE earnings are expected to stabilise, thanks to better efficiency and a lower FX impact. With that, we believe our previous expectation of unsustainable margins was too cautious, and we now forecast an 11% YoY growth in FY24F earnings, following the group’s explosive 60% YoY growth in FY23.

• Downside risks to our recommendation include a sharp rise in input costs and intensifying competition.

Source: RHB Securities Research - 30 Aug 2023