This article first appeared in The Edge Financial Daily on November 29, 2017

QL Resources Bhd
(Nov 28, RM4)
Upgrade to hold with a higher target price (TP) of RM4: QL Resources Bhd reported a second quarter of financial year 2018 (2QFY18) revenue of RM808.9 million (+10.9% year-on-year [y-o-y]) with core net profit (CNP) up 18.4% y-o-y to RM59.8 million. This brought first half of FY18 (1HFY18) CNP to RM102 million, which met expectations at 47.5% of our and 47% of the market’s full-year estimates respectively. In spite of the increase in operating costs, 1HFY18 CNP grew by 10.1% y-o-y on the back of a lower effective tax rate of 12.4% due to the availability of tax incentives (that is reinvestment allowance for its Hutan Melintang plant of RM80 million, deferred tax assets for its Indonesian operations and a 10-year tax exemption for its prawn farming business).

On a segmental basis, the group’s marine product manufacturing 2QFY18 turnover was rather flat y-o-y at RM271.5 million (-0.4% y-o-y) due to weaker fish landings post El Nino low fish cycle, particularly for its Kota Kinabalu operations. Despite the marginal revenue dip, 2QFY18 pre-tax profit fell by a larger quantum of 19% y-o-y to RM31.7 million as a result of higher production and processing costs for its surimi and surimi-based (chilled and frozen) products. Thus, 2QFY18 pre-tax margin was squeezed by 3.3 percentage points y-o-y to 14.6%.

For its integrated livestock farming (ILF), QL Resources saw a 2QFY18 turnover growth of 16% y-o-y to RM513.8 million (63.5% of total 2QFY18 sales) driven by higher sales volume of the feed raw material distribution division and stronger farm-produced prices from its Indonesia and Sabah/Sarawak units. Accordingly, pre-tax profit expanded 26% y-o-y to RM48.3 million due to lower feed raw material costs and stronger egg prices. ILF’s 2QFY18 pre-tax profit margin ticked up 0.6% points y-o-y to 5%.

Meanwhile, the group’s palm oil activities continued their positive trajectory with positive revenue (9.6% of total 2QFY18 sales) and pre-tax profit growth of 13.8% and 18.4% y-o-y respectively. This was mainly pushed by higher fresh fruit bunches produced and processed from its Indonesian oil palm operations, alongside improved crude palm oil price of RM2,650 per tonne (versus RM2,507/tonne in 2QFY17).

We make no changes to our earnings per share estimates. We upgrade our call to a “hold” (from “reduce”) as we roll over our valuations to 2019F (forecast), still pegged at an unchanged 23 times  price-earnings (PE) (in line with sector average) which lifts our TP to RM4. Even though we like the group’s long-term earnings growth prospects given its diversified and defensive staple food business model, we think that the positives have been priced in at this juncture at FY18/19F PE of 30/25 times.

Key upside risks include stronger-than-expected earnings growth from new ventures and capacity expansion for its main businesses, while downside risks include volatile commodity prices. — CIMB Research, Nov 28