QL Resources - Weakened by Plantation Hiccup

Period    2Q13

Actual vs. Expectations     The 1H13 net profits (NP) of RM68.3m came in below estimates, making up 42% and 41% of the street’s estimate and our forecast of c. RM168m, respectively.

Dividends     No dividend was declared in the quarter as expected.

Key Result Highlights    QoQ, the 2Q13 revenue was up by 11.8% underpinned by higher sales recorded in integrated livestock farming (“ILF,” +21.5% QoQ), which cushioned the drop in palm oil activities (“POA,” -5.2% QoQ). Meanwhile, the PBT grew 15.8%, thanks to better fishmeal margin registered by marine product manufacturing (“MPM,”+54.2% QoQ). YoY, the 1H13 revenue improved 10.2% on the back of better sales from MPM (+24.7% YoY) and ILF (+19.3% YoY), which cushioned the decline in POA (-29.1% YoY).

Due to a more challenging operating environment, the 1H13 PBT rose only 7.0% YoY. Its slower growth compared with the sales growth was due mainly to margins decline in POA (-1.6ppt YoY to 4.0%) and ILF (-2.2ppt YoY to 6.4%). However, there was a strong PBT growth rate registered in MPM (+61.8% YoY) was mainly due to the higher contribution and better economic of scale from its surimi and fishmeal operations in both Malaysia and Indonesia. This helped to mitigate the decrease in POA (-49.8% YoY) and ILF (-11.1% YoY). POA registered weaker results due mainly to lower CPO prices (-6.6% YoY from RM3,213 per MT) as well as a lower FFB yield.

Outlook     QL Resources remains positive on its expansion in the MPM and ILF businesses to achieve better economies of scale. Nevertheless, the prospect for POA has turned out to be worse than expected in the short run, which is in line with the poorer plantation industry outlook. This has dragged down the overall group’s performance.

Change to Forecasts     Hence, we have slashed our FY13-14E NPs by 7%-8% to RM156m-RM181m after assuming lower FFB yields of 7.0mt/ha for both years (down 30% from 10mt/ha previously) and lower CPO prices of RM3,000 (down 6% from RM3,200 previously). Nevertheless, with a younger oil palm tree age profile, we expect its POA segment to still have a positive long-term prospect despite the short-term bearish outlook on palm oil price.

Rating     MAINTAIN OUTPERFORM

 Valuation     Inline with our earnings revisions, we have reduced our TP to RM3.50 (from RM3.68 previously) based on an unchanged FY13E PER of 18.5x.

Risks    The global economic and weather uncertainties.

Source: Kenanga