QL Resources - Strong Margins

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QL's 9MFY24 results met our forecast but beat market expectations. Its 9MFY24 net profit rose 24% underpinned by improved performance across the board except for livestock farming. It guided for a slower expansion at its convenience store chain (CVS) segment on subdued consumer sentiment. We maintained our forecasts, TP of RM6.25 and MARKET PERFORM call.

QL’s 9MFY24 net profit met our expectation at 78% of our full-year forecast but beat market expectations at 83% of the full-year consensus estimate. No dividend was declared during the 3QFY as expected. For the full financial year, we expect the group to declare a 9 sen dividend, translated into a dividend payout ratio of 46%, similar to the previous year.

YoY, its 9MFY24 revenue rose 4% driven by robust performance in several key segments. The marine product manufacturing (MPM) segment saw a 2% rise to RM1.1b, thanks to better performance of fishmeal and surimi-based products contributed by higher export price helping to offset weaker performance of surimi which continued to face stiff competition internationally. The palm oil and clean energy (POCE) segment grew 18% attributed to heightened project progress in BM GreenTech. Additionally, its CVS segment expanded 27% mainly due to the opening of 28 new stores (to 385), additional FM Mini set-up and intensified marketing efforts. However, these were offset by a 2% decrease in the integrated livestock farming (ILF) segment due to lower ASP for feed raw materials.

Its core net profit rose by a steeper 24% thanks to: (i) stronger margins in fishmeal and surimi-based products from a robust USD, (ii) higher sales and improved project margins in the POCE segment, and (iii) better trading margins for feed raw materials. These were partially offset by slightly lower margins in the CVS segment due to higher labour and energy costs.

QoQ, its turnover expanded by 1%, primarily driven by improved performance in the ILF segment, attributed to higher trading volume, and the CVS segment, which saw a boost from the opening of six new stores. However, these were partially offset by weaker results from the POCE segment due to slower project progress and the MPM segment due to reduced fish landing. Similarly, its net profit inched up by 1%.

Outlook. QL's growth trajectory remains stable, supported by various segments. The ILF segment is expected to remain steady, thanks to continued government subsidy plans, while the MPM segment is anticipated to see gains from increased fish landings and improved surimi-based product performance due to El Nino. Additionally, the POCE segment's emphasis on clean energy initiatives could drive growth. However, subdued consumer sentiment may lead to moderate performance in the CVS division. The group guided for a total of 396 outlets by end-FY24, translating to a net addition of 39 outlets (vs. 60 previously).

Forecasts. Maintained.

Valuations. We are keeping our DCF-derived TP at RM6.25 (WACC: 5.8% and TG: 2%). There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 4).

Investment case. We like QL for: (i) the consistent high export demand for its marine products, supported by robust fish landings and decreasing input costs, (ii) the high growth potential of its Family Mart convenience store franchise, highlighted by its popular Japanese-themed products and continued expansion, including the new Family Mart Mini outlets targeting petrol stations and highways, and (iii) it growing poultry business in Indonesia and Vietnam, driven by increasing protein consumption as living standards rise. Maintain MARKET PERFORM rating.

Risks to our call include: (i) inability of pass on cost inflation, (ii) rough aggressive monsoon seasons, (iii) changes in fishing regulations, and (iv) MYR strengthening against the USD.

Source: Kenanga Research - 1 Mar 2024

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