This article first appeared in The Edge Financial Daily, on February 29, 2016.

QL Resources Bhd 
(Feb 26, RM4.49)
Downgrade to underperform with a lower target price (TP) of RM4.16: QL Resources Bhd’s nine-month ended Dec 31, 2015 (9MFY16) net profit of RM153.9 million (+7%) was within expectations by accounting for 74% and 71% of our in-house forecast and consensus estimates  respectively. There were no dividends, as expected.

Year-on-year, 9MFY16 revenue rose marginally by 2% to RM2.1 billion, driven by robust growth in the marine product manufacturing (MPM) division (+16.1%), thanks to higher export sales on the back of a weaker ringgit. 9MFY16 profit before tax (PBT) grew 6.8% to RM200 million, again attributable to the solid performance in the MPM division, which benefited from soft commodity prices. As a result, net profit rose 7% to RM153.9 million.

Quarter-on-quarter, for the third quarter ended Dec 31, 2015 (3QFY16), revenue increased by 6.9% to RM738 million owing to growth in the MPM division (13.2%) on seasonality, and a 7.1% growth in the integrated livestock farming division due to higher sales volumes of feedstock. 3QFY16 PBT rose 8.3% to RM76.5 million due to the higher revenue from MPM and higher crude palm oil prices, which drove the palm oil activity division’s PBT up by 25.7% to RM4.5 million. As a result, net profit grew 4.9% to RM57.9 million.

The MPM division continued to be the growth pillar with consistent and resilient performance driven by robust demand for fishmeal and the weakening of the ringgit. 

Meanwhile, the hot weather caused by El Nino also boosted fish catches in Malaysia. As such, we foresee the division to continue sustaining earnings growth of QL Resources.

Earnings growth is expected to be healthy at 10.6% and 8.9% over the next two years, underpinned by the defensive nature of its staple food products, which are less vulnerable to weak consumer sentiment. 

We made no changes to our earnings forecasts.

No changes to our TP of RM4.16, based on unchanged 23 times FY17 estimate price-earnings ratio (PER), which is close to +1.5 standard deviation over a five-year mean. 

Although we like the company for its proven earnings track record and resilient nature, we think that the valuation (24.9 times FY17 estimate PER, close to +2 standard deviation over a five-year mean) appears lofty. Thus, we downgrade our rating to “underperform” from “market perform”.

Risks include lower-than-expected egg prices and higher-than-expected production costs. — Kenanga Research, Feb 26