May 6, 2014

QAF: Still Fair after 7.8% drop $Q01.SI

QAF is one of those companies I have on my watchlist that I consider to be among one of my dearly-missed boats. I have several of such companies where their share price just blew past me right under my nose. Normally I play hard to get myself, and just tweak my watchlist. However there are some that tempt me to check back every so often.

The 7.8% drop in share price today (5 May 2014) caught my attention. It went XD and lost 7 cents in share price today, from an announced 4 cents dividend. I decided to browse the FY13 annual report and prepared a simple write-up below. All numbers and the image (except the graphs) are taken from QAF's annual reports.

QAF is an investment holding company based in Singapore that was incorporated in 1958. It has operations primarily in Singapore, Malaysia, Philippines and Australia. It is a multi-industry food company with core businesses in bakery, primary production and trading and logistics. Some of their well-known proprietary brands are Gardenia, Farmland and Cowhead. They also have one of Australia's largest pork production operations from farm to fork.


FY13: Revenue has increased by 4% (vs. FY12). The percentage of sales devoted to COGS increased from 59.74% to 60.95% (vs. FY12). 

1Q14: Revenue is down (3%) (vs. 1Q13).

Earnings and Dividends

As the number of outstanding shares keep increasing yearly, I will just mention EPS for the previous year for comparison. 

FY13: EPS decreased about (15%) from 6.60 cents to 5.60 cents (vs. FY12). Dividend per share is unchanged at 5 cents. Dividend yield is about 5.8% (share price 86.5 cents, as at date of announcement of AGM, 9 April 2014).

1Q14: Profit after tax increased by 12% to S$13.5 million (vs. 1Q13).

Balance Sheet (FY13)
Total Debt/Equity is about 18%.
Total Debt/Net Income is about 3 times.
Interest Coverage Ratio is about 12.5 times.

Free cash flow is positive at about S$35.2 million, also slightly higher than net income of S$30.2 million.

Throughout the year, the group paid S$27 million in dividends and repaid about S$6.3 million in short term debt and S$3.5 million in long term debt.

P/E is about 14.8 times based on FY13 earnings and closing price on 5th May 2014.
NAV increased to 75.6 cents for the 1Q2014 (from 72.6 cents FY13).

4 Main Risks
1. Disease and epidemic
Under the QAF umbrella, there are about 384,000 pigs and 1800 dairy cows in their farms based in Australia (Rivalea). There had been several outbreaks in recent years that resulted in mass culls of pigs and farm closures in many Asian countries. However, group is confident in the strict quarantine laws of Australia while being aware of the possible risk of disease epidemics in animal farming. Therefore there are risk management practices in place in the form of operational preventive measures.

2. Competition
The meat market is subject to periods of oversupply. The bread business competes directly against supermarket chains that have their own in-house bread and bakery products that normally compete on low-pricing.

3. Fluctuations in raw material prices
The livestock farming and meat business is subject to volatile production costs which is directly affect by grain prices. The cost of animal feed is affect by grain prices and Rivalea purchases most of its grain at harvest season. Grain prices also affect wheat prices which may increase production costs for the bakery business. In such a scenario, it may also not be feasible for the business to pass on the added costs to the consumer in the form of raising prices.

4. Foreign currency risk
The group operates in Malaysia, Philippines, Australia and thus are exposed to currency translation risk. The group does not hedge its net investments in these countries.

The strong Singapore dollar relative to the currencies of countries QAF operates in cuts both ways. The group enjoyed lower raw materials cost in the Rivalea and bakery businesses due to the higher Singapore dollar exchange rate (Cost of materials -5% for Rivalea in 1Q14). On the other hand, group revenue is impacted due to the translation effect of the higher Singapore dollar exchange rate against the domestic currencies of its businesses even though sales are increasing at the Malaysian, Philippine and Australian businesses.

Gardenia is expanding into the Greater China market with a joint venture and expects to commence production in the third quarter of 2014.

Barring major shocks to the global economy (or swine flu or another AUD plunge etc), the main key to increased profitability in the short term for QAF will be lower raw materials cost. I am not sure why the management expects raw material costs to stabilize this year. I am not an expert on commodities but taking wheat for example; the US wheat production this year is forecast to drop, coupled with the extended hot, dry weather at the wheat farming areas and Ukraine (another major wheat exporter), it must take a really solid crystal ball to predict the volatility of wheat this year. Source

QAF pays a relatively generous (and stable) dividend for a food-related business, and this should count as one merit to be a shareholder.

I am not that optimistic that it is able to replicate its first quarter earnings throughout the rest of the year. If I were to take past earnings (FY12/13) as a guide, the seasonality of its earnings demonstrate 1st/4th quarter earnings to be the strongest for the year. Simply put, if EPS for first quarter 2014 is 2.3 cents, that will probably be the best earnings quarter QAF will have until the fourth quarter. Although I am ashamed to use such a rudimentary way as a measure of earnings, it at least highlights the unstable earnings throughout the year for QAF, and if I were to hazard a conservative estimate for FY14, it would be about 7 cents, unless the Group manages to pull out something spectacular that it was not able to do in FY12 and FY13. 

Action: I would wait till at least the second half of the year to see how earnings play out and not get too carried away by the first quarter. Technical chart-wise it could probably bounce at 81.5/80/78 cents (with no particular timeframe in mind). May is not a good time of the year to expect a high price from the market!

Disclaimer: I have no vested interests in QAF and don't listen to me, I am just a clueless punter. 

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