Review

• QL Resources Berhad’s (QL) 1QFY24 core earnings of RM92.8mn (+12.6% YoY) met expectations, accounting for 24% of both ours and the market’s full-year projections. No dividend was declared in the quarter under review.

• YoY, 1QFY24 revenue rose 5.1% to RM1,599.4mn, driven by higher contributions across the board, including: (i) Marine Product Manufacturing (MPM) (+4.4%), (ii) Palm Oil and Clean Energy (POCE) (+23.9%), and (iii) Convenience Store Chain (CVS) (+26.6%), partially offset by decline in Integrated Livestock Farming (ILF) (-2.9%). In line with topline growth, the EBIT grew substantially by 26.6% to RM152.4mn backed by margin recovery in MPM, ILF and POCE.

• MPM Segment. 1QFY24's segmental sales grew 4.4% YoY underpinned by better fish landing in the new fishing season coupled with stable fuel costs. QL profited significantly from the restricted fishmeal supply from Peru due to severe El Nino weather evidenced by high profitability in fishmeal products. However, this growth was partly offset by softer Surimi performance, as Russia flooded the Asian market with supply. The segment’s PBT increased 13.9% YoY, thanks to improved production efficiency and favourable export gain.

• POCE Segment. The segment’s revenue rose 23.9% in 1QFY24, thanks to higher FFB production at 36kMT and stabilised CPO price at c.RM3,800. The segmental PBT tripled YoY, driven by higher project delivery coupled with significant margin improvement at BM GreenTech (BMGT, formerly Boilermech) and better OER from higher FFB output. To note, the disposal of Sabah mill 2 is expected to complete by 4QFY24 and generate c.RM7mn cash proceeds.

• ILF Segment. The segment’s sales dropped marginally by 2.9% YoY, owing to lower trading volume and flat selling price for feed raw material, albeit higher volume at higher prices for farm produce. That said, the segmental PBT grew substantially by 20.6% YoY, mainly because of better performance of Malaysia and Indonesia farming operations, which produced more at higher efficiency. Also, the segment partly offset the high input costs with higher cost subsidy from the Malaysia government.

• CVS Segment. The revenue growth of 26.6% YoY in CVS segment chiefly attributed to establishment of 73 new Family Mart (FM) outlets and 58 new FM Mini (kiosk) units. However, the segmental PBT slid 26.9% given the higher opex, which included labour and utility cost.

Impact

• Maintain our earnings forecasts.

Outlook

• Conclusively, we anticipate QL's business performance will remain intact despite high interest rates and a weak global economy outlook. ILF's outlook is cautiously positive, benefiting from sustained productivity with cost subsidies from the Malaysian government and improving operations in Vietnam and Indonesia. On the flipside, POCE's growth will be driven by higher-margin project deliveries from BMGT, while CVS's earnings will be fuelled by a new store expansion plan.

• Given Japan's recent release of treated radioactive water into the Pacific Ocean, we believe the impact on QL should be minimal. QL does not source its fish from Japan regions, and its primary client base is in ASEAN countries. Meanwhile, MPM's prospects remain strong due to resilient demand for fishmeal products, driven by a successful fishing season and production setback in Peru, albeit surimi sales may continue to be affected by increased competition from Russia.

Valuation

• Maintain Buy with an unchanged DCF-driven target price of RM6.70/share (k: 6.4%; g: 3.0%).

Source: TA Research - 30 Aug 2023