QL’s 2QFY23 core net profit doubled to RM93.9m, on the back of stronger contributions from all segments, except the Palm Oil and Clean Energy (POCE) segment. Cumulative 1HFY23 core net profit of RM176.3m was above our and consensus estimates, accounting for 57% and 59% respectively. The discrepancy in our numbers was mainly due to the stronger-than-expected margins from the Marine Product Manufacturing (MPM) segment. We tweak our forecast for FY23-25F upwards by an average of 4%, to factor in the stronger operating margins from the MPM segment. Following our earnings adjustment, our DCF derived TP has been raised subsequently to RM6.05. However, we downgrade our call on QL to Neutral given the limited upside potential as we think that future growth prospects have largely been priced in from the recent run in its share price.

• 2QFY23 revenue grew by 31.3% YoY to RM1.64bn as all operating segments recorded higher sales growth. MPM segment sales increased by 24.1% YoY, on higher selling price and volume on all activities except surimi-based products due to labour constraint. Integrated Livestock Farming (ILF) topline jumped 30.4% YoY, given the higher feed raw material trading volume and selling price, supported by higher farm produce selling price. Convenience Store Chain (CVS) surged by 57.3% YoY, driven by pent-up demand and higher store count. POCE segment saw its revenue increased by 22.9% YoY, due to higher project progress at Boilermech but was partially offset by the lower CPO price and FFB tonnage processed.

• 2QFY23 core net profit jumped 104.4% YoY to RM93.9m, mainly driven by a notable improvement in ILF segment’s margins given the recovery in farming operation particularly Vietnam, further supported by the cost subsidy in Malaysia. Both MPM and CVS benefitted from the better economies of scale. However, POCE was affected by the high input cost which resulted in a thinner project margin from Boilermech.

• Outlook. We are still optimistic on QL’s future growth, premised on higher export demand for surimi based products, recovery in regional egg prices and an increase in subsidy to help mitigate the impact of high feed cost. However, we think that the strong margin from the MPM segment in 1HFY23 is not sustainable, on seasonality factors (monsoon) in 4QFY23. Additionally, the CVS segment should see slower earnings growth in the near-term, on weaker consumer spending given the rising inflationary pressure. Outlook for POCE segment remains challenging, mainly dragged by weaker CPO prices and manpower shortage and raw material costs which will likely affect Boilermech’s project margins.

Source: PublicInvest Research - 30 Nov 2022