QAF Limited (“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.
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.
It was worth noting that their Primary Production Rivalea have been classified as discontinued operations in the Annual Report for FY2021 and successfully disposed off subsequent to year end. After the special dividend, 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.
Edit on February 2025: Due to image formatting issues and change in writing style, I have removed images that were used in this article. This will allow for a more professional presentation of the website. As the information here pertains to periods that are many years ago, please refer to the latest post for this category for the most updated information.
Edit on March 2025: Formatting updates.
Financial highlights
Revenue
Based on the FY2021 full year audited results announcement on 25 March 2022, it was noted the revenue from continuing operations decreased by 1% to SGD558million (FY2020: SGD561million). 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 in view of an inflationary environment.
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 FY2021 for continuing operations have decreased to SGD0.039 per share as compared to SGD0.073 per share in FY2020. This is mainly attributable to profit from continuing operations decreasing by 47% to SGD22million (FY2020: SGD41million).
The significant decrease in profit was largely due to higher raw materials cost in FY2021 This includes increases in flour prices and lower government supports in FY2021. Other operating expenses have also increased (resulting from the flood at a Malaysian bakery factory and higher distribution and transportation expense, amongst others), and utilities (resulting from oil and gas prices increasing from FY2020 to FY2021).
This metric is Unfavorable aspect of the dividend stock. Furthermore with the Russia invasion of Ukraine, flour and oil prices are going to increase which in turn will affect QAF’s cost of sales and their bottom lines.
Operating Cash Flows
Net cash generated from operating cash flows have increased to SGD109 million in FY2021 compared to SGD95 million in FY2020. This represents an increase by 14% from the prior year and is also higher than their 6 year average.
Perusing through their financial statements however, it was worth nothing that the operating cashflows is supported by increase in trade and other payables by SGD32 million. This means that they are delaying payments to suppliers which may be a sign of cashflow issues. This is thus Neutral.
Price-to-book ratio
Net Asset Value (“NAV”) of the Group also increased to SGD0.922 per share (FY2020: SGD0.898). Based on the closing share price of SGD0.840 as at 10 June 2022, this translates to a Price-to-book (“P/B”) ratio of 0.91. 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 remained constant at 50% as at 31 December 2021 similar to 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.
I have also adjusted from FY2018 to FY2016 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.
Whilst the current debt-to-equity ratio is higher, it is an improvement with the disposal of their Primary Production business. Nonetheless 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.
Computation as below:
Sustainable dividend yield
Excluding the one-off special dividend paid in January 2022, 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 FY2021 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 FY2022 will remain unchanged at SGD0.05 per share. Using the closing share price of SGD0.840 as at 10 June 2022, this translates to a recurring dividend yield of 5.95%. 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.
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 SGD34.3 million in FY2021.
Adjusting the net profit into net profit before depreciation would result in the adjusted earnings per share below, which are more than sufficient to cover the dividend payout.
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 2021.
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.
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: Ukraine Invasion Threatens Global Wheat Supply
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.
Website: Why Are Gasoline Prices So High? Ukraine-Russia War Sparks Increases Across U.S.
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. However, it remains to be seen how badly their operations may be affected as costs continue to rise.
I am Neutral on the closing share price SGD0.840 as at 10 June 2022, as there may be further decline in prices in the near future. Admittedly this is a contrast to my view previously, especially as we navigate the uncertainties in today’s economy.
