On 24 February 2023, QAF Limited (“QAF”) has announced their full year result for FY2022. Overall the continuing operations have definitely worsened in 2022, which is not unexpected given the ongoing Ukraine conflict which played a significant part in affecting their cost of sales. Without the one of gain of total insurance payments from the severe flooding in Peninsular Malaysia, their earnings per share is around SGD0.011 per share for FY2022.
Barring any unforeseen circumstances, the worst and uncertainties of 2022 are over and they are still in a strong financial position to navigate 2023. They have also successfully disposed of their primary business in January 2022, and with the disposal, the primary business is now behind them. They can focus on the key core businesses they have remaining.
Management have intended as well to continue expanding their trading and distribution business. From management view, their capital light, scalable approach will concentrate on the sale and distribution of long shelf-life products and is complementary to their expansive distribution and supply chain network across ASEAN, with potential to expand into China and Australasia region. There is opportunity for QAF to develop a stronger moat.
Website: Financial Statements And Related Announcement::Full Yearly Results
Background
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
| Metrics | Current | Previous |
|---|---|---|
| Revenue | +3.0% | +1.0% |
Revenue from continuing operations increased by 3.0%. This metric is Neutral aspect of the dividend stock. While it is great that they have managed to increase their revenue slightly, they were unable to increase it substantially in view of an inflationary environment which have been at record highs.
Earnings per share
| Metrics | Current | Previous |
|---|---|---|
| Earnings per share | -71.8% | +78.6% |
With the disposal of the primary business, the FY2022 Basic and Diluted earnings per share for continuing operations have increased by 15.4% to SGD0.045 per share as compared to SGD0.039 per share in FY2021.
It was worth noting however that the increase is mainly attributable to exceptional item of SGD19.5 million. This was the total interim insurance payment of MYR62.0 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 FY2022 have decreased by 71.8% to SGD0.011 per share as compared with FY2021 largely due to higher raw materials and energy costs, especially the increase in flour prices and utilities. Cost of materials have increased by 17% and utilities have increased by 15%. These increases are more than proportionate than the increase in revenue by 3%.
This metric is Unfavorable aspect of the dividend stock.
Operating Cash Flows
| Metrics | Current | Previous |
|---|---|---|
| Operating Cash Flows | -52.0% | -72.4% |
Net cash generated from operating cash flows amounted to SGD52 million in 2022, a decrease compared to SGD109 million in FY2021. This represents a decrease by 52.0% from the prior year.
Perusing through their financial statements however, the reason for the decrease was due to the absence of the prior year profit before tax from discontinued operations of SGD48.4 million, of which there is a loss of SGD6.3 million in FY2022. This metric is thus Neutral on the basis that the continuing operations did not have a significant negative impact to their operating cashflows, and I still need to wait another 1 year for the results to stabilize.
With an expected dividend paid of SGD28.8 million based on SGD0.05 per share, operating cashflows is more than sufficient to payout the dividends.
Price-to-book ratio
| Metrics | Current | Previous |
|---|---|---|
| Price to Book Ratio | 0.99 | 0.99 |
The Price-to-book (“P/B”) ratio for QAF is 0.99. This is computed using the Net Asset Value (“NAV”) of the Group as at 31 December 2022 amounted to SGD0.865 per share and the closing share price of SGD0.855 as at 24 February 2023. This is Favorable as it translates to paying a small discount for QAF business.
Debt-to-equity ratio
| Metrics | Current | Previous |
|---|---|---|
| Debt-to-equity ratio | 33.1% | 30.0% |
Debt-to-equity ratio stands at 33.1% as at 31 December 2022. The metrics is 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.
Interest coverage
| Metrics | Current | Previous |
|---|---|---|
| Interest coverage | 23.2x | 23.2x |
The interest coverage stands at 23.2 times as at 31 December 2022, using profit before tax of SGD37.2 million and finance costs of SGD1.7 million. The high interest coverage ratio is due to the Group have very minimal borrowings compared to their total assets. The metric is Favorable.
Dividend yield
| Year | Yield | Total |
|---|---|---|
| 2022 | 8.19% | SGD 0.070 |
| 2021 | 5.85% | SGD 0.050 |
| 2020 | 5.85% | SGD 0.050 |
| 2019 | 5.85% | SGD 0.050 |
| 2018 | 5.85% | SGD 0.050 |
With the exception of 2022 with the special dividend payout of SGD0.020 from the disposal of their poultry business, QAF have been paying out consistent dividend of SGD0.050 per share throughout the years since 2012.
With a recommended FY2022 final dividend by the board of SGD0.040 per share, assuming the total dividend payout in 2023 will remain unchanged at SGD0.05 per share and using the closing share price of SGD0.855 as at 24 February 2023, this translates to a recurring dividend yield of 5.85%. For my benchmark, a general reasonable range would be around an average of 5.5% to 6.5%. The dividend yield is thus Favorable and comparable with Real Estate Investment Trusts (“REITs”) whose mandates are to distribute majority of their earnings as dividends.
Website: Reasonable Dividend Yield 2023Q1
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 amortization and depreciation expense, which is a non-cash expense, amounted to SGD28.5 million in FY2022.
Adjusting the net profit into net profit before amortization and depreciation would result in the adjusted earnings per share of SGD0.061 per share, which is more than sufficient to cover the dividend payout. For reference, I have also reduced the net profit for the exceptional item of SGD19.5 million as below.
| Description | Amount |
|---|---|
| Profit after tax from continuing operations | SGD 26,004,000 |
| Amortization and depreciation adjustment | SGD 28,549,000 |
| Total insurance payments adjustments | SGD 19,536,000 |
| Adjusted net profit | SGD 35,017,000 |
| Number of shares | 575,268,440 |
| Adjusted earnings per share | SGD 0.061 per share |
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 31 December 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 is currently 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 SGD200 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 SGD116 million.
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.
Cost of sales
In the previous year, the invasion of Ukraine sent wheat prices up in mid May as traders were worried that the fighting could halt the harvest or disrupt shipping of vital grain supplies through the black sea. Ukraine is one of the largest exporters of grain in the world. Since then, the feared shortages weren’t as bad as first anticipated, and subsequently prices dropped.
With global warming however, there is new found risk as wheat futures are likely to head back higher due to brutal frost snaps in March. Snow tends to form an insulating blanket over the germinating wheat plants, so protecting them from the cold. However, this few months there is a lack of the snow which may result in the wheat crop getting damaged in the event of a harsh frost.
Website: Weird Winter Weather Set To Send Wheat Prices Back Higher
While this event may not necessary send the wheat prices skyrocketing as in 2022, combined with the uncertainty regarding the ongoing conflict in Ukraine, this will likely help keep wheat prices higher than they would otherwise have been.
Summary
| Metrics | Financials | Rating |
|---|---|---|
| Revenue | +3.0% | Neutral |
| Earnings per share | -71.8% | Unfavorable |
| Operating Cash Flows | -52.0% | Neutral |
| Price to Book Ratio | 0.99 | Favorable |
| Debt-to-equity ratio | 33.1% | Favorable |
| Interest coverage | 23.2x | Favorable |
| Overall | | Favorable |
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 SGD216 million which is equivalent to SGD0.375 per share. This is a strong buffer to cover their operation expenses and dividend payouts.
Disclaimer: Not financial advice. All data and information provided on this site is for informational purposes only.
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Website: QAF Limited (SGX: Q01): 2022 Half Year Result, Focusing on Stable Core Businesses
