KEY INVESTMENT HIGHLIGHTS

• Within expectations
• Revenue growth across segments
• Core PATANCI marginally higher
• Maintain NEUTRAL with unchanged TP of RM4.83

Within expectations. QL Resources chalked in 2QFY25 revenue of RM1.9b (+15.6%qoq; +10.8%yoy) and core PATANCI of RM128.3m (+19.4%qoq, +4.6%yoy) which brought 1HFY25 core PATANCI to RM235.7m (+9.4%yoy). This met our full-year FY25 forecast and consensus at 44% and 50% of full-year expectations respectively. This performance aligns with expectations due to the seasonal nature of its businesses.

Revenue growth across segments. QL's 1HFY25 revenue rose +6%yoy to RM3.49b, supported by growth across segments. The Integrated Livestock Farming (ILF) segment led the growth, with revenue increasing +6.9%yoy, primarily supported by higher egg sales and improved performance in feed raw materials. Similarly, the Convenience Store Chain (CVS) segment posted a strong revenue growth of +15.4%yoy, underpinned by better average sales per store and an expanded store network. The Marine Product Manufacturing (MPM) segment contributed a steady revenue increase of +2.2%yoy, reflecting consistent demand for surimi-based products despite challenges in fishmeal activities. However, the Palm Oil and Clean Energy (POCE) segment saw a slight decline in revenue by -3.0%yoy, impacted by slower project progress in its solar business.

Core PATANCI marginally higher. QL recorded a 1HFY25 core PATANCI of RM235.7m, representing a growth of +9.4%yoy. The ILF segment contributed significantly to earnings, with its earnings rising +13.2%yoy during the period, driven by improved margins in feed raw material trading and stronger farming operations across Malaysia, Indonesia, and Vietnam. The CVS segment posted an impressive +27.7%yoy growth in earnings, supported by network expansion and stronger average store sales. Meanwhile, the POCE segment delivered a +52.5%yoy increase in earnings, reflecting higher margins from solar projects at BM Greentech despite reduced fresh fruit bunch processing.

The MPM segment, however, saw a slight decline in operating profit by - 4.6%yoy, due to under performance of fishing & aquaculture activity, as well as export margin erosion from weakening of USD. Overall, the group's operating profit margin expanded by +0.4 ppts to 9.9%, with core PATANCI margin rising +0.2 ppts to 6.7%.

Strategic developments. BM Greentech Berhad, a subsidiary of QL Green Resources, completed the acquisition of Plus Xnergy Holdings Sdn. Bhd. (PXH) on 25 October 2024 for RM110m, satisfied via share issuance. A special issuance was concurrently executed to maintain QL Green Resources' 52.57% stake, alongside a bonus issue of up to 171.95m warrants priced at RM1.88 per warrant, with listing on 16 December 2024. This acquisition strengthens QL's clean energy capabilities, aligning with its long-term sustainability goals.

Maintain NEUTRAL with unchanged TP of RM4.83. Given that the 1HFY25 core PATANCI came in within our expectations, we make no changes to our earnings forecast. We maintain our NEUTRAL call with an unchanged target price of RM4.83, derived from a 10-year multi-stage DCF model with a 3.5% growth rate and 7% WACC. While we remain positive on the developments in QL, we believe the positives have been more than priced in.

Outlook. We remain optimistic that QL Resources is poised for continued growth in 2HFY25. We opine that the ILF & MPM segment will benefit from stable demand, lower input costs, and government cost subsidies for farm produce. CVS is expected to gain from seasonal festive demand and improved consumer sentiment, spurred by civil servant wage reforms. POCE is well-positioned to capitalize on strong solar project pipelines and favorable CPO price trends, bolstered by its strategic acquisition of Plus Xnergy. Despite global uncertainties, including geopolitical tensions and fluctuating forex rates, QL's diversified business model and strategic focus on renewable energy offer resilience and growth opportunities, sustaining our cautiously positive outlook.

Potential downside risks are: (i) increase in operating cost which will overspill to consumers and squeeze margins in MPM, ILF and CVS, (ii) rough weather conditions in tandem with the expected onset of La Nina in the end-year, (iii) strengthening of MYR against USD which will negatively impact export revenues, and (iv) weaker-than-expected consumer sentiment.

Source: MIDF Research - 2 Dec 2024