Flat profit ahead likely for QL Resources

PETALING JAYA: QL Resources Bhd could deliver a flattish profit in the financial year of 2025 (FY25), due to the upcoming reduction in egg subsidies and a slower expansion of Family Mart outlets.

CGS International (CGSI) Research, which downgraded its call on QL to “hold”, said FY25’s core net profit may only grow by 0.7% year-on-year, following an estimated growth of almost 21% in the ongoing FY24.

QL will enter FY25 beginning April 1.

It is noteworthy that the government subsidy for eggs will be reduced in the second half of 2024.

Meanwhile, CGSI Research pointed out that the QL management guided that new Family Mart convenience store openings would be slowed in FY24 to account for weaker consumer sentiment.

“Mitigating these negatives would be continued weakness in the prices of surimi, the raw material for its marine product manufacturing (MPM) business.

Also, the addition of new manufacturing capacity in Surabaya for its MPM business, where capacity remains the key driver of growth is also seen as a mitigating factor,” it said.

Despite downgrading its rating, CGSI Research has maintained its target price at RM6.10 per share.

The research house also said that QL’s latest interim dividend supports the thesis of a new dividend trend.

“QL’s interim dividend of 3.5 sen per share, announced together with its third-quarter of FY24 results, is supportive of our and consensus’ expectations of increased absolute dividends, in line with higher profits post-FY22.

“We are assuming a dividend payout ratio of 38% in FY24, before moving up to 40% in FY25 onwards, with interim dividends of 3.5 sen per share each year. We note that despite this increase in absolute dividend payments, QL’s balance sheet would continue to de-gear from its healthy cash flows, barring any sizable acquisitions,” it said.

The research house also estimated that QL’s net debt-earnings before interest, tax, depreciation and amortisation would reduce to 0.26 times by FY27 from 1.4 times as at end-FY23.

Looking ahead, CGSI Research opined that QL’s 2024 price-to-earnings multiple of 34.3 times would cap its share price upside in light of the expected earnings consolidation in FY25.

The stock’s recent share price performance (up 3.8% year-to-date) has also narrowed its upside to CGSI Research’s target price.

“Upside risk would come from higher margins across its core businesses spurring net profit growth and a substantially higher dividend payout ratio.

“Downside risks, meanwhile, would come from a sharper drop in margins from subsidy removals, as well as prolonged weakness in consumer sentiment weighing on its convenience store business.

“For exposure to the Malaysian consumer sector, we would prefer MR DIY Group (M) Bhd for its cheaper valuations and better growth prospects,” stated CGSI Research.