QAF Limited (“QAF”) has successfully disposed of their primary business in January 2022 and took a large loss to its profit and loss with the disposal. However with the disposal, the primary business is now behind them. They can focus on the key core businesses they have remaining and these have shown to be stable in the first half of 2022.
QAF is a leading multi-industry food company with core businesses in Bakery 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 9,000 employees. They are listed on the Singapore Exchange Securities Trading Limited.
The bakery operations cover Singapore, Malaysia, the Philippines and Australia. They produce branded packaged bread and unpackaged bread, as well as a wide range of frozen and par-baked specialty French-style breads and pastries.
The distribution and warehousing business in Singapore remains one of their core businesses. They are a leading importer and distributor of a wide range of international food brands, including their very own Cowhead, Farmland, Haton, Orchard Fresh and Spices of the Orient proprietary brands.
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.
Financial highlights
Revenue
Based on the 1H20221 results announcement on 5 August 2022, it was noted the revenue from continuing operations increased by 1%. This metric is Neutral aspect of the dividend stock. While it is great that they have managed to maintain their revenue, they were unable to increase it substantially in view of an inflationary environment which have been at record highs.
Earnings per share
With the disposal of the primary business, the Basic and Diluted earnings per share for 1H2022 for continuing operations have increased to SGD0.025 per share as compared to SGD0.014 per share in 1H2021.
It was worth noting however that the increase is mainly attributable to exceptional item of SGD9.6 million due to the Group received the first interim insurance payment of MYR30.0 million under the Group’s insurance policy covering damage to its property, plant and equipment in connection with the severe flooding at one of the Group’s Malaysian factories.
Excluding this one off gain, performance of 1H2022 have decreased as compared with 1H2021 largely due to higher raw materials and energy costs in 1H2022, especially the increase in flour prices and utilities.
This metric is Unfavorable aspect of the dividend stock. Furthermore with all the uncertainties in the market, cost of sales may continue to increase.
Operating Cash Flows
Net cash generated from operating cash flows amounted to SGD15 million in the first half of 2022. If extrapolated to the full year, the net cash generated from operating cash flows will have decreased to SGD30 million compared to SGD109 million in FY2021. This represents a decrease by 72% from the prior year and is also lower than their 6 year average.
Perusing through their financial statements however, the reason for the decrease was due to repayment of trade and other payables by SGD24 million. The operating profit before working capital changes amounts to SGD28 million for 1H2022, where extrapolated to the full year will amount to SGD56million. While the operating profit before working capital changes is more than sufficient to sustain the dividend payout, these timing differences for payments may indicate cash flow issues. This metric is thus Neutral.
Price-to-book ratio
Net Asset Value (“NAV”) of the Group as at 30 June 2022 amounted to SGD0.872 per share. Based on the closing share price of SGD0.860 as at 5 August 2022, this translates to a Price-to-book (“P/B”) ratio of 0.99. This is Favorable as it translates to paying a small discount for QAF business. Keep in mind however that the discount may be due to market expectations of poor results moving forward.
Debt-to-equity ratio
Debt-to-equity ratio have improved to constant at 30% as at 30 June 2022 since the previous financial year. This is after adjustment for their “assets and liabilities belonging to disposal group classified as held for sale” due to their discontinued operations which was sold after year end. This is due to significant repayment of payables and borrowings with the profits made in 1H2022 and disposal of the primary business.
For reference, I have adjusted FY2021 and FY2020 for their assets and liabilities belonging to disposal group classified as held for sale and FY2018 and FY2017 for SGD40.5 million due to adoption of SFRS(I) 16 Leases for right-of-use assets and lease liabilities so that the figures are comparative. This amount was from their initial recognition as at 1 January 2019. Noted that the amount is significantly lower as at 31 December 2021, with right-of-use assets and lease liabilities amounting to SGD22 million and SGD26 million respectively.
Computation as below:
Despite the adjustments, there is still an overall improvement in the debt-to-equity ratio. The metrics is still Favorable as QAF is less reliant on external sources to fund operations. With the profitable continuing operations, this can be further lowered in the near future.
Sustainable dividend yield
QAF have announced an interim dividend of SGD0.01 per share be paid at a date that is announced later. Excluding the one-off special dividend paid in January 2022, this is in line with the SGD0.05 dividends QAF have been distributing 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
Assuming the total dividend payout in FY2022 will remain unchanged at SGD0.05 per share, using the closing share price of SGD0.860 as at 5 August 2022, this translates to a recurring dividend yield of 5.81%. In my opinion, this is sustainable and 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.
It was worth noting however that the dividend payout has been more than their earnings per share throughout history. This is made possible given that depreciation and amoritsation expense, which is a non-cash expense, amounted to SGD14.7 million in 1H2022.
Adjusting the net profit into net profit before depreciation and amortisation would result in the adjusted earnings per share, which are more than sufficient to cover the dividend payout. For reference, I have also reduced the net profit for the exceptional item of SGD9.6million, and extrapolated the remaining net profit of SGD5million and depreciation and amortisation expense to the full year as below.
The issue with this however, is management signaling that there is not much capital expenditure required to replace their assets. Annual repair and maintenance will be sufficient to maintain their assets, which is cheaper than purchasing a new asset. Investors will need to take note if they are comfortable with the idea that their assets are able to last longer than the pre-determined useful lives as at 30 June 2022.
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. Gardenia Singapore will be undertaking an exercise in 2022/2023 to upgrade the equipment capability and improve
efficiency for their production facilities in Singapore.
During FY2016 to FY2019, QAF had invested in expansion capex of approximately $200 million to expand their overall bakery production capacity. QAF also plan to further invest in expanding production capacity for their core markets in Singapore, Malaysia and the Philippines. The aggregate investment is estimated to be approximately $116 million.
The recent flooding has also significantly reduced operations. Although this is covered by insurance, there may still need further repairs and maintenance.
Considering that QAF have been paying dividends more than their earnings, they may not have sufficient cash to pay for the upgrades. Thus investors need to take note of possible dividend cuts.
Russia invasion of Ukraine
Russia’s invasion of Ukraine in February 2022 have resulted in major supply chain disruptions. Furthermore, Russia and Ukraine together supply more than a quarter of the world’s wheat, which is the main raw material for QAF bakery production. The invasion will no doubt affect QAF’s operations as they have to seek other alternatives and compete with producers around the world.
Website: Analysis: As wheat prices soar, the world’s consumers vote with their feet
Furthermore, oil prices, already turbocharged by a rebounding economy after a pandemic-induced slowdown, were pushed even higher when Russia’s invasion of Ukraine pulled some three million barrels of Russian oil a day from global supplies. In FY2021, QAF have already cited rising utilities costs playing a major role in lowering their operating profits, and these can already be seen to affect the 1H2022 results.
Website: Singapore’s Exposure to Energy Crisis Seen in Wild Price Spike
Coming disruptions could fuel higher food prices and social unrest, which in turn paint an undesirable result for QAF in FY2022.
Summary
In conclusion, QAF has developed strong economic moats as the market leader of the bakery segment in Singapore, Malaysia and Philippines in the past decade and a reliable defensive stock in today’s volatile market. The stock is a good option for those considering to add for its long term sustainable dividend payout. They also have cash and cash equivalents of SGD205 million which is equivalent to SGD0.355 per share. This is a strong buffer to cover their operation expenses and dividend payouts.
