• Downgrade to NEUTRAL from Buy, new TP of MYR6.27 from MYR6.46, 8% upside. QL Resources’ 9MFY24 results exceeded expectations on the better- than-expected performance of its integrated livestock farming (ILF) unit. After revising our earnings estimates, the unfavourable change in the composition in our SOP valuation led to a cut in our TP. As such, we turn NEUTRAL on the stock, as its current valuation is fair in view of the flat earnings growth ahead from a high FY24F base.

• 9MFY24 results outpaced estimates. Net profit of MYR339m (+24%) accounted for 83% of both our and consensus full-year forecasts. The positive deviation could be attributed to a stronger-than-expected contribution from the ILF business. Post-results, we raise FY24-26F earnings by 3-5% after increasing our ILF net profit forecast and toning down our numbers for its marine product manufacturing (MPM) and convenience store (CVS) segments. As a result, our SOP-driven TP drops to MYR6.27, which is inclusive of a 2% ESG premium and implies 36x P/E FY25F, below the stock’s 5-year mean.

• Results review. YoY, 9MFY24 revenue grew 4% to MYR5bn, mainly underpinned by robust growth of the CVS division (+27%) on the back of a net addition of 42 new stores. Meanwhile, 9MFY24 PBT jumped 33% to MYR491m, boosted by a higher contribution (+40%) from the ILF unit, thanks to better feedmill margins and a government subsidy. Meanwhile, the MPM segment remained the key earnings anchor, with 9MFY24 PBT growing 12% to MYR224m from easing input costs and favourable FX rates. QoQ, 3QFY24 revenue and net profit growth was flattish, with higher MPM earnings stemming from a better PBT margin offsetting the softer ILF contribution. The ILF numbers were dragged by the withdrawal of a subsidy for broiler chickens in Malaysia and a weaker performance from its overseas operations.

• Outlook. QoQ growth is likely to soften, in view of the monsoon season affecting the MPM business, the normalisation of feedmill margins from a high base, as well as the consumer boycott resulting in lower CVS sales volumes. Beyond the immediate term, MPM and ILF should continue to anchor the earnings – with the former benefitting from easing input costs and the latter aided by the government subsidy for eggs and contributions from its newly acquired layer farm. Meanwhile, the CVS segment should contribute to overall growth on its store network expansion, with the easing of the boycott sentiment following the convenience store chain parent’s announcement to end its business partnership with an Israeli party.

• Downside risks to our recommendation include a sharp rise in input costs and a low fish catch cycle. The opposite circumstances would constitute upside risks.

Source: RHB Research - 1 Mar 2024