Review

• QL Resources Berhad’s 9MFY17 core earnings of RM113.3mn, after excluding exceptional items of RM35.4mn, came in below ours and consensus estimates at 56% and 54% of full-year forecasts respectively. The variance was due to higher-than-expected tax rate. At PBT level, QL’s 9MFY17 earnings were generally in line.

• 9MFY17 revenue increased across all divisions including Marine (MPM), Palm Oil (POA) and Livestock (ILF) by 5.8%, 4.8% and 5.5% respectively YoY. These were due to i) higher surimi based products, fishmeal and deep sea fishing operations contribution, ii) higher CPO price (3QFY16:RM2,867/tonne vs 3QFY15: RM2,094/tonne), and iii) increased feed raw materials traded in the ILF division. These have translated into better PBT YoY for POA and ILF divisions. MPM recorded lower PBT by 6.5% to RM120.1mn due to lower contribution from surimi and prawn aquaculture operations.

• QL’s 3QFY17 adjusted earnings improved marginally by 0.2% QoQ to RM41.4mn. Revenue improved QoQ across all divisions (MPM/POA/ILF:+5.3%/+32.0%/+8.1%), however PBT only improved by 6.7% QoQ to RMRM75.4mn due to a decline in ILF PBT by 32.4% QoQ as there were lower contribution from Indonesian poultry unit as well as lower raw materials trade margin.

• The group declared a special single-tier interim dividend of 3 sen/share during the quarter under review.

Impact

• We lower our FY17 and FY18 earnings forecast by 21.6% and 23.6% respectively after adjusting effective tax rate higher.

Outlook

• QL has partnered with FamilyMart to provide a new revenue stream hence diversifying the group’s earnings risk. However, management guided that it will take up to 5 years to breakeven. For the time being, capex and costs are incurred on expanding FamilyMart chain by 10 new outlets/year and this would burden the group’s earnings margin.

Valuation

• Taking the above into consideration, we have cut our target price lower to RM4.17/share (previously RM4.71/share) based on SOP valuation with CY17 PER. Call remain as SELL.

Source: TA Research - 1 Mar 2017