This article first appeared in The Edge Financial Daily on November 28, 2018

QL Resources Bhd
(Nov 27, RM6.90)
Maintain neutral with a raised target price (TP) of RM6.61: QL Resources Bhd recorded a double-digit revenue and net profit growth of 13.8% and 10.7% year-on-year (y-o-y) in the second quarter of financial year 2019 (2QFY19) respectively. The performance was within our and consensus expectations, at 46% of full-year forecasts. The better performance was mainly driven by a lower tax expense given the availability of reinvestment allowance as well as a stronger performance of marine products manufacturing (MPM) due to a gradual recovery in fish catch, helping to offset a weaker performance in the integrated livestock farming (ILF) segment and the loss incurred in palm oil activities (POA) segment.

QL has opened a FamilyMart store in Johor this month, the first outside the Klang Valley. So far, it has opened 73 FamilyMart stores, on track to achieve its target of 89 store openings by end-FY19. We extended our discounted cash flow (DCF) valuation to 10-year period to capture the turnaround and long-term growth of FamilyMart. Our DCF-based TP is subsequently raised to RM6.61 from RM4.68 previously. While we expect the group’s fundamentals to remain strong on the back of its resilient business model, we maintained our “neutral” call as we believe its stock price had reflected its potential growth prospects.

For its MPM, revenue and net profit resumed its double-digit growth, recording 22.6% and 21.0% y-o-y growth in 2QFY19, mainly driven by a gradual recovery of the low fish catch cycle and higher contributions from surimi-based products on the back of upping new capacity from Hutan Melintang plants. While profit before tax (PBT) margin was lower by 0.2 percentage points to 14.7% in 2QFY19, compared with 14.9% in 2QFY18, we expect the margin to improve on the back of the gradual recovery in fish catch in the coming quarters.

Its ILF, meanwhile, saw 2QFY19 revenue rising 11.1% y-o-y, mainly due to higher sales contribution from poultry units in Peninsular Malaysia. PBT however declined 2% y-o-y due to lower contributions from poultry units in Indonesia and East Malaysia.

Its POA also saw 2QFY19 revenue increasing 6.4% y-o-y, mainly due to the sale of unsold crude palm oil (CPO) stocks despite a decrease in its own fresh fruit bunch production. However, the segment recorded a loss before tax of RM1.6 million versus PBT of RM3.1 million in 2QFY18, mainly due to a lower oil extraction rate in the Indonesian plantation unit due to a poor fruit setting, as well as a lower CPO price at RM2,198 in 2QFY19 versus RM2,650 in 2QFY18. We expect the segment to continue to be impacted by an unfavourable CPO price outlook. — PublicInvest Research, Nov 27