• Maintain NEUTRAL with a higher SOP-derived MYR5.60 TP from MYR5.31, 1% upside. 1HFY23 (Mar) results beat expectations on stronger- than-expected margins. We believe QL Resources will be able to sustain its earnings recovery trajectory following the broader reopening of economy on better containment of the pandemic thanks to its strong market position and diversified business model. That said, the rich valuation may already have reflected its solid fundamentals and defensive attributes.

• 1HFY23 results were above expectations. Core net profit of MYR176m (+100% YoY) accounted for 59% of our and consensus’ forecasts on stronger-than-expected margins. Post results, we raise FY23F-25F earnings by 6-9%. Correspondingly, our SOP-derived TP rises to MYR5.60 (inclusive of a 2% ESG premium), which implies 42x P/E FY23F or close to the stock’s 5-year mean.

• Results review. YoY, 1HFY23 sales rose 28% to MYR3.2bn driven primarily by the 29% jump in contribution from integrated livestock farming (ILF) wing on higher ASPs for both raw materials trading and farm products whilst marine product manufacturing (MPM) continued to churn solid growth. The convenience stores (CVS) business grew in tandem with a higher number of FamilyMart stores. Similarly, ILF division was the main profitability driver thanks to the improved farm prices and subsidies from the Government for the ceiling price enforcement. QoQ, 2QFY23 revenue grew 8% to MYR1.6bn thanks to healthy growth across all division. Meanwhile, MPM margin expanded sharply by 6.6ppts on the back of higher production output and ASPs, and favourable FX. As a result, 2QFY23 net profit jumped 14% to MYR94m.

• Outlook. The strong earnings momentum should sustain into 3QFY23F considering the seasonal pattern of QL’s MPM business whereas the ILF product prices have stayed elevated in key markets. That said, we highlight the risk of the strong ILF earnings tapering off in 4QFY23F, taking into account the cyclicality and price volatility of the poultry industry. On the other hand, the CVS division should continue to grow on the back of FamilyMart outlet expansion and footfall recovery in tandem with the broader economic reopening. All these will underpin the forecasted FY23 earnings growth of 51%, in our view.

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

Source: RHB Research - 30 Nov 2022