Overview. QL’s 2Q22 PBT slipped 27% yoy to RM70.8m mainly due to 2 key reasons. Firstly, lower sales across all MPM activities and higher operation costs as a result of lower production volume due to re-emergence of low fish landing cycle and supply disruption in fishing activities from the shortage of foreign fishing crew caused by Covid-19 lockdown. Secondly, there was severe margins erosion in farming products due to higher feed raw material prices and slow recovery in egg selling price - despite 22% increase in sales on higher feed raw material trading price and improved egg price and volume. On contrary, POCE segment improved significantly resulting from positive contribution from plantation division on higher CPO selling price and the inclusion of Boilermech as subsidiary. On quarterly basis, results were encouraging due to higher profit contribution from MPM segment as well as gain on share of profit from associate amounting to RM0.18m as oppose to a loss of RM9m in 1Q22.

Against estimates: Below. QL’s 1H22 profit was below our and consensus’ estimates. Group’s PBT margin fell to 5% from 9% in 1H21 with MPM, ILF and POCE margins declined to 17%, 1% and 8% respectively from 21%, 2% and 11% previously registered in 1H21.

Outlook. Despite the unencouraging 1H22 earnings results, we believe QL would continue to attract high valuation due to: 1) qoq performance is on track to achieve better result in FY22; 2) consumer-driven business which is regarded as recession-proof; 3) its status as one of the largest marine product players in Asia; and 4) its high compliance to ESG and Halal standards which will continue to attract global funds.

Our call. Following this result, we revised our FY21/FY22 earnings forecast lower to RM159m and RM272m respectively from RM265m and RM288m previously as we adjusted MPM and ILF segments’ costs and margins assumptions. As QL’s share price has fallen by 23% YTD, we now see potential upside from here in the stock with upside of 27%. Upgrade to BUY from HOLD with new SOP-derived TP of RM5.67 (RM6.00 previously), which implies a FY22F PER of 68.6x at current market price.

Source: BIMB Securities Research - 30 Nov 2021