On 8 August 2023, QAF Limited (“QAF”) has announced their half year result for FY2023. Although QAF has recorded lower earnings, they are still able to generate cash flow from operations and are in a strong financial position to navigate any uncertainties in the short-term.
Management also indicated that QAF will remain focused on expanding its trading and distribution business. This 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 the potential to expand into China and the Australasia region. This will fuel growth moving forward.
Website: Financial Statements And Related Announcement::Half 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 | +12.0% | +3.0% |
Revenue from continuing operations increased by 12.0%. This metric is Favorable aspect of the dividend stock.
The Bakery segment sales increased by 10% (17% in constant currency) to SGD216 million for the first half of 2023. The increased sales contributed to the improved Bakery EBITDA. Distribution & Warehousing segment also achieved increase in revenue by 12% to SGD80.3 million, up from SGD71.6 million in the first half of 2022, mainly contributed by higher sales to food services, export and retail supermarkets.
Earnings per share
| Metrics | Current | Previous |
|---|---|---|
| Earnings per share | -64.0% | -71.8% |
The FY2022 Basic and Diluted earnings per share for continuing operations have decreased by 64.0% to SGD0.009 per share as compared to SGD0.025 per share in the first half of 2022. This metric is Unfavorable aspect of the dividend stock.
The main reason for the decrease was due to a non-cash impairment of SGD9.2 million, as part of the Group’s share of profits or losses of joint venture, Gardena Bakeries (KL) Sdn Bhd (“GBKL”). This was based on an assessment on the recoverable amount of its investment.
Operating Cash Flows
| Metrics | Current | Previous |
|---|---|---|
| Operating Cash Flows | +9.2% | -52.0% |
Net cash generated from operating cash flows amounted to SGD16 million in the first half of 2023, an increase compared to SGD15 million in the same period in the prior year. This represents an increase by 9.2%.
Perusing through their financial statements, although profit have decreased, the reason for the increase in operation cash flow was due to non-cash expense of share of losses in joint venture. This was adjusted in the statement of cash flows and contributed to the increase in operation cash flow. This is Favorable.
With an expected dividend paid of SGD28.8 million based on SGD0.05 per share, it is sufficient to payout the dividends if QAF is able to generate similar cash flow from operations in the second half of 2023.
Price-to-book ratio
| Metrics | Current | Previous |
|---|---|---|
| Price to Book Ratio | 0.98 | 0.99 |
The Price-to-book (“P/B”) ratio for QAF is 0.98. This is computed using the Net Asset Value (“NAV”) of the Group as at 30 June 2023 amounted to SGD0.827 per share and the closing share price of SGD0.810 as at 30 August 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 | 32.4% | 33.1% |
Debt-to-equity ratio stands at 32.4% as at 30 June 2023. 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 | 11.1x | 23.2x |
The interest coverage stands at 11.1 times as at 30 June 2023, using profit before tax of SGD11.1 million and finance costs of SGD1.1 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 |
|---|---|---|
| 2023 | 6.17% | SGD 0.050 |
| 2022 | 8.64% | SGD 0.070 |
| 2021 | 6.17% | SGD 0.050 |
| 2020 | 6.17% | SGD 0.050 |
| 2019 | 6.17% | SGD 0.050 |
| 2018 | 6.17% | 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.
Assuming the total dividend payout in 2023 will remain unchanged at SGD0.05 per share and using the closing share price of SGD0.810 as at 30 August 2023, this translates to a recurring dividend yield of 6.17%. 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 2023Q3
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 SGD11.2 million in the first half of 2023.
Adjusting the net profit into net profit before amortization and depreciation would result in the adjusted earnings per share of SGD0.029 per sharefor the first half of 2023. Assuming QAF is able to generate the same amount of cash flows for the second half of 2023, it will be sufficient to maintain the dividend payout. Computation as below.
| Description | Amount |
|---|---|
| Profit after tax from continuing operations | SGD 4,970,000 |
| Amortization and depreciation adjustment | SGD 11,206,000 |
| Adjusted net profit | SGD 16,176,000 |
| Number of shares | 575,268,440 |
| Adjusted earnings per share | SGD 0.028 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 30 June 2023.
Key things to note
Aging manufacturing plants
As at 31 December 2022, 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.
Summary
| Metrics | Financials | Rating |
|---|---|---|
| Revenue | +12.0% | Favorable |
| Earnings per share | -64.0% | Unfavorable |
| Operating Cash Flows | +9.2% | Favorable |
| Price to Book Ratio | 0.98 | Favorable |
| Debt-to-equity ratio | 32.4% | Favorable |
| Interest coverage | 11.1x | Favorable |
| Overall | | Favorable |
In conclusion, with the exception of the loss from joint venture, QAF is still in a strong financial position which will allow the Group to pursue any suitable growth opportunities.
QAF also has cash reserves of SGD193 million, which is equivalent to SGD0.337 per share, available to assist the Group to withstand unexpected financial stress that may arise. This is a strong buffer to cover their operation expenses and dividend payouts. and the stock is a good option for those considering to add for its long term sustainable dividend payout.
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 Full Year Result
