QL's 1HFY25 met expectations. Its 1HFY25 net profit grew by 9%, driven by robust feed raw material trading sales, coupled with improved margins for solar projects. The ILF segment thrives on strong feed trading and higher egg production, offsetting lower prices, while MPM benefits from input cost savings despite weaker USD weighing on surimi-based exports. Growth prospects are further bolstered by clean energy initiatives under POCE and expected consumer sentiment boosts from year-end festivities and civil servants' salary hike. We upgrade QL to MARKET PERFORM (from UNDERPERFORM) with a revised DCF- derived TP of RM4.60 (from RM4.20), reflecting better margins and growth prospects.

Its 1HFY25 net profit of RM235.7m met expectations at 50% of both our full-year forecast and the full-year consensus estimate. As expected, no dividend was declared during the quarter. For the full financial year, we expect the group to declare a total dividend of 5 sen, implying a dividend pay-out ratio of 35%, in line with its historical trend.

YoY, its 1HFY25 revenue grew 6% mainly driven by a 15% growth in convenience store chain (CVS) segment. This was supported by net addition of 34 stores, bringing the total to 413, alongside higher average store sales during festive periods and better consumer sentiment from initial EPF Account 3 withdrawal in the first quarter.

The integrated livestock farming (ILF) segment also saw a 7% improvement, as significantly higher sales in feed raw materials trading and increased egg production (from the Peninsular layer farm acquired in 3QFY24), more than offset lower feed raw material unit price and reduced egg ceiling price in Malaysia.

Its net profit expanded by 9% primarily due to: (i) improved margin for solar projects under Palm Oil and Clean Energy (POCE) segment, and (ii) substantially higher feed raw material trading sales with stable margins and stronger Malaysia layer operations, supported by lower feed costs and egg cost subsidies in the ILF segment.

QoQ, its 2QFY25 top line increased 16%, fuelled by better performance across all segments, except CVS which experienced a marginal decline due to lack of festive demand. Its bottom line rose by a steeper 19% thanks to stronger margins across most segments, despite the seasonal weakness in CVS. The Marine Product Manufacturing (MPM) division benefitted from lower input costs for fishmeal and surimi, though margins were partially offset by the weaker USD impacting surimi-based exports. Meanwhile, the ILF unit saw improved margins, mirroring the factors driving its YoY improvement.

Outlook. QL's growth trajectory remains intact, supported by steady demand in the MPM and ILF segments, aided by continued cost subsidies and lower surimi input costs. The POCE segment is expected to drive growth through its focus on clean energy initiatives under BMGREEN (with a TP of RM1.36). Additionally, consumer sentiment is also expected to improve with the upcoming year-end festive season and civil servants' salary hike effective Dec 2024.

Forecasts. We fine-tune up our FY25F and FY26F earnings forecasts by 2% each to reflect lower input costs, particular for surimi (under MPM segment) and feed raw materials (under ILF segment), as well as better margins resulting from enhanced cost efficiency. Subsequently, we also raise our long-term EBIT margin assumption to 9.5% from 8.5%.

Valuations. Post earnings revision, we lift our DCF-derived TP by 10% to RM4.60 (from RM4.20), based on an unchanged WACC of 5.8% and TG of 2%. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 4).

Investment case. We like QL due to: (i) the strong and consistent export demand for its marine products, supported by robust fish landings and declining input costs, (ii) the high growth potential of its FamilyMart convenience store franchise, highlighted by its popular Japanese-themed products and continued expansion, including the new FamilyMart Mini outlets targeting petrol stations and highways, and (iii) its growing poultry business in Indonesia and Vietnam, driven by rising protein consumption as living standards improve. Upgrade to MARKET PERFORM from UNDERPERFORM.

Risks to our call include: (i) inability to pass on cost inflation, (ii) rough aggressive monsoon seasons, (iii) changes in fishing regulations, and (iv) strengthening of MYR against USD.

Source: Kenanga Research - 2 Dec 2024