• Maintain NEUTRAL with new TP of MYR4.59 from MYR4.24, 6% downside. QL Resources’ 1HFY25 (Mar) results beat expectations primarily on better- than-expected Integrated Livestock Farming (ILF) division earnings. We maintain our call do not see increasing appetite for defensive shelters to drive a major rerating from the lofty valuation QLG is trading at now. In addition, we expect earnings growth to slow in FY26F from the elevated base in anticipation of normalised ILF margins.

• QLG’s 1HFY25 results were above expectations. Core net profit of MYR236m (+9% YoY) accounted for 50-54% (vs 3-year average of 47%) of our and consensus’ forecasts due to the stronger-than-expected ILF margin driven by lower feed costs and favourable market conditions. Post results, we raise FY25-27F earnings by 9%, 9%, and 8%. Correspondingly, our SOP- derived TP rises to MYR4.59 (inclusive of a 2% ESG premium), which implies 34x P/E FY25F or below the stock’s 5-year mean.

• Results review. YoY, 1HFY25 revenue rose 6% to MYR3.5bn, primarily underpinned by the robust growth in ILF (+7%) and convenience stores (CVS) (+15%) pillars. The former was lifted by the higher raw material trading and egg volumes whilst the latter was supported by new store expansions (+34 to total of 413 outlets). Meanwhile, 1HFY25 PBT grew 10% to MYR344m, similarly boosted by the rising ILF and CVS contributions but the marine product manufacturing (MPM) division saw marginal dip due to ASP pressures for fishing and fishmeal segments as well as unfavourable FX. QoQ, 2QFY25 revenue and net profit jumped 16% and 19%, spurred by stronger showings of ILF (government subsidies) and MPM (seasonally-driven).

• Outlook. We foresee MPM earnings to stay elevated based on the seasonal patterns before tapering off in 4QFY25F whilst the rebound in USD and lower input costs should support earnings margins. That said, the competition in the fishmeal market may persist, hence posing downside risks to earnings. Elsewhere, the ILF business should continue to prosper on easing feed costs and government subsidies in Malaysia whilst the improving market conditions in Indonesia and Vietnam bode well for QLG. Meanwhile, outlet expansion to deepen market penetration and the environment of rising disposable income next year would be catalysts for the CVS wing to drive earnings growth. Lastly, the outlook for palm oil and clean energy (POCE) division is positive considering the elevated CPO prices and rising contribution from the solar business.

• Risks to our recommendation include sharp rise in input costs and a low fish catch cycle.

Source: RHB Securities Research - 2 Dec 2024