QL Resources Bhd
(Feb 27, RM3.77)
Downgrade to market perform rating with a higher target price (TP) of RM3.90: Net profit of RM143.8 million (+18.6%) for the nine-month of financial year ending March 31, 2015 (9MFY15) was within expectations at approximately 75% of both our and consensus forecasts.

Year-on-year revenue rose 10.4% to RM2 billion, driven by all operating segments — integrated livestock farming (ILF) and marine product manufacturing (MPM) — and palm oil activities (POA). Meanwhile, profit before tax (PBT) recorded impressive growth of 19.8% to RM187.2 million, again underpinned by balanced growth across all divisions.

The MPM division benefited from higher average fishmeal price (+22.3%) and robust demand of surimi-based products; the ILF segment was aided by lower feedstock costs and higher egg prices, as well as stronger demand for feedstock; while the POA division saw narrowed losses from its Indonesia operations and higher contribution from Boilermech Holdings Bhd (+27%).  

Quarter-on-quarter(q-o-q), the third quarter of FY15 (3QFY15) PBT grew 19.8% to RM74.6 million on the back of higher revenue (+11.6%) amounting to RM732.8 million, thanks to a steady growth of its core ILF and MPM divisions with revenue growth of 16% and 10% respectively. During the period, MPM managed to record PBT growth of 27.6% due to the higher production on seasonality as well as higher fishmeal prices (+11%). Meanwhile, ILF also registered eye-catching growth of 18.8% due to the higher raw material trading volume as well as higher egg prices (+12.8%) during the quarter, and further helped by the easing of feedstock prices. 

On its outlook, the group is well on track to meet our earnings forecast which reflects 19% of net profit growth, driven by growth across all division. Moving forward, we expect the earnings growth momentum to be sustained, banking on the core operating segments, ILF and MPM which contributed 92.6% to the group’s PBT as of 9MFY15. 

We expect the robust demand of surimi-based products and the higher fishmeal prices to drive the ILF division while MPM is poised to benefit from the lower feedstock prices on the back of the easing of commodities prices, namely maize and soybean, as well as the higher egg prices.

We make no changes to forecasts. We downgrade QL to “market perform” from “outperform.” We roll over our valuation to FY16 before deriving our higher TP of RM3.90 (from RM3.86) by pegging it with an unchanged 22.7 times price-earnings ratio, which implies +1.5 standard deviation over three-year mean. While we like QL for its exciting and stable earnings growth, we think that the share price could have factored in the positives. Potential upside is limited from our TP, thus we downgrade the stock to “market perform”.— Kenanga Research, Feb 27

This article first appeared in The Edge Financial Daily, on March 2, 2015.