QAF Limited (“QAF”) is a leading multi-industry food company with core businesses in Bakery, Primary Production, and Distribution and Warehousing. QAF have an extensive operations and distribution network in the Asia-Pacific region including Singapore, Malaysia, the Philippines, Australia, Myanmar, Thailand, Cambodia, Hong Kong, Taiwan, Macau and Brunei. The Group, together with their joint venture in Malaysia, currently employs over 10,000 employees. They are listed on the Singapore Exchange Securities Trading Limited.
Brands under their wing includes:
- Gardenia, the leading packaged bread brand in Singapore, the Philippines and Malaysia.
- Bakers Maison, a French-style bread specialist manufacturer in Australia that produces par and full-baked frozen bread, pastries and sweets.
- Rivalea, one of Australia’s leading vertically integrated industrial pork companies.
It was worth noting that Rivalea have been classified as discontinued operations in the Annual Report for FY2020. This indicates management’s intention to dispose of the Primary Production business within a year from 31 December 2020. The proceeds will be used to support the growth of the core Bakery and Distribution and Warehousing businesses of Singapore, Malaysia and the Philippines and the expansion of such businesses in ASEAN within the growing 650 million population.
Financial highlights
Revenue
Based on the FY2020 full year audited results announcement on 25 March 2021, it was noted the revenue from continuing operations increased by 13% to S$561million (FY2019: S$497million), and profit from continuing operations increased by 131% to S$42million (FY2019: S$18million).
Although the pandemic has affected operations, being in the consumer staples sector, the financial performance of the Group has not been adversely affected. As QAF is a major supplier of consumer staples in their respective regions, demand for their products spiked, especially in the early stages of the pandemic when there was panic buying.
A detailed snapshot of their business by revenue stream and geographical location are as below:
Earnings per share
The Basic and Diluted earnings per share for FY2020 remain unchanged at SGD0.048 per share. This was due to a loss amounted to SGD0.025 per share from discontinuing operations, offset by earnings per share from continuing operations amounting to SGD0.073 per share. With the disposal of the Primary Production business, earnings will be expected to improve from 2021 onwards.
Price-to-book ratio
Net Asset Value (“NAV”) of the Group also increased to SGD0.898 per share (FY2019: SGD0.882). Based on the closing share price of SGD1.010 as at 23 April 2021, this translates to a Price-to-book (“P/B”) ratio of 1.12. This is favorable as it translates to paying a small premium for QAF business.
Debt-to-equity ratio
Debt-to-equity ratio have also improved to 68% as at 31 December 2020 compared to the previous financial year of 70%. It was worth nothing however that with the disposal of the Primary Production business, the Debt to Equity ratio will improve to 50%. This will be favorable as QAF will thus be less reliant on external sources to fund operations. With the profitable continuing operations, this can be further lowered in the near future.
Computation as below:
Sustainable dividend yield
QAF have been distributing SGD0.05 dividends since 2012. While Dividends.sg only showed data up to 2019, refer to the corporate actions as per the link below for dividend history prior to 2019.
Link: QAF dividend history before 2019
Based on the FY2020 full year audited results, management have proposed a final dividend of SGD0.04 per ordinary share. This is consistent with historical trend and my expected total dividend payout in FY2021 will remain unchanged at SGD0.05 per share. Using the closing share price of SGD1.010 as at 23 April 2021, this translates to a recurring dividend yield of 4.95%. In my opinion, this is sustainable in view of the disposal of the Primary Production business and that earnings per share will continue to improve in FY2021.
For a Company that is involved in the manufacturing business, this is a favorable dividend yield, comparable with Real Estate Investment Trusts (“REITs”) whose mandates are to distribute majority of their earnings as dividends.
Further noted management have also highlighted their intention to propose a payment of special dividend of SGD0.02 per share upon successful closing of the Group’s Primary Production business. This one-off dividend will translate to 1.98% based on the closing share price of SGD1.010 as at 23 April 2021, a good added bonus to their already recurring dividend payouts.
Possible expansion plans
With the expected divestment of Rivalea, management can focus on their core competencies. One way to grow the business is to expand into nearby ASEAN countries. The next two untapped markets would be Indonesia and Vietnam, with populations of 276 million and 98 million respectively as of today, both significantly larger than the countries QAF have presence in.
Website: World population review
Given QAF core competencies in the Bakery and Distribution and Warehousing segments, it would be easy for QAF to consider setting up joint ventures and tapping on already existing supply chains. As QAF operates in a staple food industry, there will naturally be demand for their products and could use their market presence in other ASEAN countries to build the brand locally.
However, while it has low barriers to entry to penetrate, the industry is one that is already saturated and will require significant capital and time to to build market presence. For instance, based on the EIBN Sector Reports by the German-Indonesian Chamber of Industry and Commerce in 2019, PT Nippon Indosari Corpindo, is the biggest industrial producer of bread, with 90% market share. It will be difficult for QAF to expand and achieve market dominance.
Nonetheless, once carried out successfully, it could significantly improve profits and improve shareholder returns.
Key things to note
Aging manufacturing plants
QAF’s subsidiary, Gardenia Singapore, has two plants in Singapore have been in operations as early as 1993. Plant equipment have aged, requiring obsolete spare parts for ongoing maintenance. As such, Gardenia Singapore has adopted a 3-Phase Upgrading Plan for its two plants which is expected to cost approximately S$20 million. The first 2 phases of the plan which started in 2020 and expected to complete by third quarter 2021.
The final phase, planned to start in first quarter 2022, will be an installation of a completely new production line to improve food safety and hygiene standards, production efficiency and help to reduce future maintenance costs and manpower requirements.
While capital expenditure is part of the usual business activities, it is worth noting that this will be carried out in the ongoing Covid-19 pandemic. If restrictions are tightened, this may lead to delays in the completion of the upgrading plans, translating to disruptions to the business and loss of income.
Disposal of Primary Production Rivalea
Launched in the 2nd half of 2020, the sale process of Rivalea is ongoing. The sale process, and preparation for it, had required significant efforts from Rivalea’s management and staff during the year. This had been impacted by the Covid-19 pandemic which added complexities to the sale process and ongoing operations. Nonetheless, Rivalea management has sought to ensure that the sale process has not materially disrupted ongoing business operations.
However, should there be any delays to the disposal of the Primary Production business, this will translate to the Group bearing more costs given that the Primary Production segment has been loss making. Shareholders should take note if there are any issues relating to the disposal.
2020 a one-off event
Based on management’s expectations, although there was a significant improvement over 2019, the bakery business is expected to moderate from 2021 onwards, as it has started to normalize from 2H 2020 with gradual easing of restrictions and re-opening of businesses.
The forward growth will thus depend on the divestment of their Primary Production business which is expected to continue incurring losses up till disposal date. We should thus keep an eye out for any news updates and forward moving plans from there.
Rising costs
In 2021, new Covid-19 variants have appeared and these are noted to be more contagious. Since the outbreak in 2020, various forms of pandemic-related restrictions have been imposed by governments in Singapore, Malaysia, the Philippines and Australia in response to the pandemic. There is a decrease in supply while increase in demand for transportation due to ecommerce. While QAF operates as an essential business and is not directly implicated by the rising costs, should the rest of the supply chain be affected this may translate to higher costs, which will in turn affect their profit margins.
Website: High costs straining transportation budgets
Summary
In conclusion, a steadily growing company along with sustainable dividend payouts declared by the company’s management to its shareholders every single year over the past 8 years, are reasons why I fancy the company. QAF has developed strong economic moats as the market leader of the bakery segment in Singapore, Malaysia and Philippines in the past decades.
QAF has proven itself to be a reliable defensive stock in today’s volatile market, in view of the impact of Covid-19. QAF is fully cognizant of the challenges such as an increase in competition and has come up with a ‘strategy of sustainable growth and value creation’. All in all, if QAF manages to execute its strategy, it will continue to dominate its business segments and deliver sustained growth and dividends to shareholders.
I believe closing share price SGD1.010 as at 23 April 2021 to be Under Valued, and the stock is a good option for those considering to add for its long term sustainable dividend payout. However, it will require further clarity on the divestment of Rivalea to determine the potential upside in share price.
Assessment overview as below:
