Listed on SGX, QAF Ltd might surprise you with their portfolio of consumer goods. Think Gardenia & Bonjour! But did you know that QAF is more than just a producer of white bread in Singapore & Malaysia?

Formerly Ben & Company Ltd, QAF was listed on the Singapore Stock Exchange in 1967 & by the 1970s, became one of the largest importers & distributors in Singapore & Malaysia . Yep they own Ben Foods (S) Pte Ltd as well but more on that later! In 1984, the company’s name was changed to QAF Ltd & the rest was history.

STOCK INFORMATION

1

TICKER SYMBOL: SGX:Q01
MARKET CAP: S$598 million (Updated  13 May 2016)
MARKET PRICE / SHARE: S$1.07 (Updated 13 May 2016)
SECTOR: Consumer Products
INDUSTRY:
 Packaged Food

THE BUSINESS

Not just a Singapore and Malaysia bread producer, QAF today has over 50% of their revenue from Australia and the Philippines. Recently, QAF has commenced their Gardenia business in Fujian, China in 2014 and currently distributes to 9 major cities in the Fujian Province. Interestingly, Gardenia was the official bread supplier for the 1st National Youth Games of the PRC.

Doing more than just making bread, QAF earns their keep in 3 core businesses:

1. Bakery (S$ 516 million | 52% of FY2015 Rev)

Gardenia

Source: QAF 2014 Annual Report

QAF bakes the bread and sells the bread. That’s pretty how they bring home the bacon.

Singapore: Gardenia occupies a strong market position. Under Gardenia Foods (S) Pte Ltd, Gardenia was ranked the ‘No. 1 Selling Bread Brand’, in terms of both sales value and sales volume by A.C. Nielsen during the period from July 2013 to June 2014.

Malaysia: Gardenia KL clinched Gold in the Putra Brand Awards for the 6th year in a row. And with a 65% market share of the Peninsular packaged bread market, Gardenia KL looks to be the clear leader there. On a Ringgit basis, revenue was up 3% to RM786 million on the back of white bread demand. Even with the 20% divestment of Gardenia KL, Gardenia Malaysia still had plans for Malaysia with the purchase of a new piece of land in Johor Technology Park to increase capacity. This RM172 million project aims to be able to produce 8,000 loaves of bread and 20,000 pieces of tortilla wraps per hour and operations are expected to commence in 2017.

Philippines: Gardenia continues to dominate with 65% of the packaged bread market in the Metro Manila area. Since their foray into the Southern Archipelago in 2010, revenue contribution from the Philippines went from S$87 mil to S$140 mil and the best part is that they still appear to have a long growth runway.

Australia: QAF conducts their bakery operations under the brand of Bakers Maison – the opposite of Gardenia. Instead of the normal packaged bread we are used to, Bakers Maison’s modus operandi is in authentic par baked and frozen french style bread, pastries and sweets distributed to foodservice operators in Australia.

2. Primary Production (S$375 million | 38% of FY2015 Rev)

Bacon

This segment came from QAF’s wholly owned subsidiary Rivalea (acquired in 2001) and their 80% owned entity – Diamond Valley.

Rivalea does pork from farm to fridge.

They are involved in the whole meat processing value chain from stockfeed milling (with feed production costs a significant part of operations, it helps that Rivalea produces all the company’s stockfeed in-house), breeding and farm operations, abattoir operations, deboning, meat cutting, packaging of fresh meat products and meat distribution under their proprietary brands.

Formerly known as Bunge Meats Group of Australia, Rivalea was purchased by QAF for a cash consideration of A$157 million (S$145 million) back in 2001. Rivealea is the largest producer of pork meat in the Australasian region (Australia, New Zealand and New Guinea). We aren’t kidding when we say that Rivalea is a large producer,  accounting for ~20% of Australia’s total meat production and also count among the top exporters of pork to places like Singapore and Japan. In 2015, Rivalea produced and sold about 812,000 heads or more than 62,000 MT of meat. To place things in perspective, a car weighs roughly 2 tons.

Their 80% subsidiary is no small fry either – Diamond Valley slaughtered ~658,000 heads per annum, improving from ~470,000 heads back in 2010. And with an adjacent piece of land spanning 1.8ha acquired in 2012 earmarked for future expansions, it looks like there might still be legs for growth. In the company’s exact words, “the Company is facing increasing demand for its services and products”.

3. Trading & Logistics (S$105 million | 11% of FY2015 Rev)

Cowhead & Farmland, do these 2 brands ring a bell?

Yep QAF is the owner of these and other brands through their subsidiary Ben Foods (S) Pte Ltd. QAF doesn’t produce these products but rather make their money from being a wholesale distributor of not only their proprietary brands but also third party products to the foodservice industry. Foodservice industry include food manufacturers, F&B outlets, supermarkets , hotels, bakeries, and more.

Next, QAF through NCS Cold Stores (S) Pte Ltd owned and operates one of the largest independent cold store in Singapore. In layman’s term, a cold store is a giant fridge storing all sorts of stuff from fish and meat all the way to fresh fruits and vegetables.

On a segment results level, Trading and logistics made up only ~4% of profits.

Others

Beyond the top 3, QAF still had investment properties providing them with rental income during FY2015.

In earlier years (last 10Y), QAF were involved in the Dairy Farm business (Oxlade Dairy in 2014), Juice Concentrate business (Shaanxi Hengxing in 2010) and the Milk & Dairy products business (Challenge Australia placed under liquidation in 2010). This was in line with the Group’s explicit intention to focus on their core businesses (the 3 above) and divestment of non-strategic business.

KEY STATISTICS (FY2015)

Revenue: S$998 million
GPM: 48%
OPM: 7.1%
NPM: 5.5%
ROE (Shareholders): 12.3%
ROA: 7.3%

KEY OPPORTUNITIES

1. Consistently Strong Operating Cash Flow

Net Profit is opinion, Cash is fact

At the end of the day, it’s all about the cash. A quick indicator is Net Income as a % of Op CF and for the past 7Y, NI as a % of Op CF has not crossed the 70% mark. For FY2015, NI was 63% of Op CF.

If NI as a % of Op CF is consistently < 100%, it can imply that you are good at collecting cash from your customers. We like that.

A consistently strong cash flow stemming from their mature operating markets (SG & MY) affords QAF the luxury to fund capacity expansions and distribution roll outs in growth markets (Philippines & China), giving them a nice runway for growth. Did we also mention that since 2009, QAF had their borrowings lowered by 40% from S$140 mil to FY2015’s S$87 mil and with Cash and Equivalents of S$109mil, they currently have more than enough cash to cover 100% of their borrowings. Also bar any future acquisitions of an epic scale (anything > S$100 million), QAF should be able to handle it comfortably with their current resources at hand.

Since 2011, QAF has been declaring an annual dividend of ~S$27 mil. With FY2015 Operating CF of S$87 mil and Cash of S$109 mil, it appears that their dividend is not at stake. At current prices, this translated to a dividend yield of 4.5%.

2. China & The Philippines Potential 

Gardenia China

Source: QAF 2015 Annual Report

Taking Philippines as an example, QAF has done quite a decent job in terms of expanding. Since 2010, revenue contribution from the Philippines bakery segment increased from S$87 mil to S$140 mil. With 3 brand new strategic bakery developments in 2015, inclusive of a new 6,000 loaves per hour plant in Laguna (near Manila). In recent years, Gardenia has been using the Merto Manila area as a foothold whilst expanding their distribution reach further South (Zamboanga) and East (Surigao). At this point in time with revenue of over S$140 mil from the Philippines contributing 14% of the Group’s revenue, QAF’s Philippines operations are more than just ‘potential’, they are can already be considered as a substantial provider of cash flow.

On the other hand, China is a different ball game. Not that its QAF’s first time in China (previously had fruit juice operations through Shaanxi Hengxin) but with their China Gardenia operations still in the infancy stage, the onus of proof is still on QAF. As of FY2015, their China operations were still not profitable due to the high start up costs and advertising and promotional costs incurred since their operations at their factory with a capacity of more than 13 million bakery products per year commenced in Oct 2014. Fujian was explicitly declared as the Group’s pilot project and foothold for future developments in China.

The patriarch of the Salim Family – Sudono Salim also known as Liem Sioe Liong was born in Fuqing, Fujian, China. Fujian is Gardenia’s first foothold in China. Coincidence? We don’t think so. This is not the first time the Salim Group has done business in Fujian.

Just for reference, let’s just take Singapore & Peninsula Malaysia’s population to be ~25 million. Philippines has a population of over 100 million. And for the main event, China stood at over 1.3 billion. Let that sink in.

3. Signs of New Developments

Are there any significant developments on the sidelines?

Things that happened recently:
– Change in Board Composition in 2014
– Number of new Non-Executive Directors on Board related to either the Salim Family or KMP Pte Ltd Group of companies.
– Completion of most of their non-core assets
– Cash pile building up coupled with a reduction of Debt
– New Group Deputy MD in 2014
– Option for major shareholder to purchase a block of shares from the Chairman

We have no idea on what the future holds for sure, so all we can do is to lay out the above. We leave it to you to come to your own decision.

KEY RISKS

1. Tough Nature of Their Primary Production

At the end of the day, their primary production business appear to be linked to commodity prices especially the cost side of the equation (feed cost). It was implied that grain and feed costs were a significant portion of costs. This might have resulted in the Primary productions’s segment profit fluctuating all the way from -S$23 mil all the way to S$33 mil in the past 8Y. For FY2015, Revenue from this segment stood at S$16.8 mil, a level not seen since 2009.

We might not be able to know for sure but the segmental results from Primary Production appear to be somewhat negatively correlated with wheat prices, meaning to say, the higher the wheat prices, the lower their profits.

Interestingly their primary production segment – Hamsdale International Pte Ltd which consisted of Rivalea and Diamond Valley (80%) had serious plans for  being spun off as a separate publicly listed entity on the SGX back in 2009. Even one of QAF’s Executive Directors stepped down to join Hamsdale as an Executive to prepare the company for a potential listing on the SGX, that was how serious things got. However, these plans were scrapped in 2013 concluded with the repayment of S$10 mil worth of Exchangeable Bonds.

2. Regulatory Concerns 

In February 2016, the company entered into  a conditional sale and purchase agreement to dispose of a 20% shareholding of the Group’s investment in Gardenia Bakeries (KL) Sdn Bhd for MYR90 million reducing their interest from 70% to 50%. The last time this happened was in 2001 where QAF Group completed the sale of 30% of its stake in GBKL to Padiberas Nasional Berhad (‘Bernas’) for ~S$25 million. The recent 20% sale in 2016 was also to Bernas. Bernas is a subsidiary of Tradewinds (M) Berhad (Delisted from Bursa in 2013) – an investment holding company primarily engaged in the rice, plantation and sugar business. Bernas is Malaysia’s partner in the domestic paddy and rice industry.

The rational behind this sale was to be compliant with the 3x manufacturing licenses issued by the Malaysian Ministry of Trade and Industry (MITI) to Gardenia KL – whereby at least 70% of the total issued share capital of Gardenia KL must be owned by Malaysian citizens. After the sale, Gardenia KL is 50% owned by QAF and 50% owned by Bernas, an exemption obtained from MITI.

The sale was done at a PE Ratio of ~12.2x Gardenia KL’s FY2015 Net profit.

The next question then would be “is their other 20% stake in Gardenia KL still at stake?”. We might not know for sure, what we do know is that this was a reduction of over S$2 million in Profit after Tax to QAF’s coffers. On the other hand, if this divestment leads to an increase in Gardenia KL’s revenue as a Group (maybe Bernas could open more doors), although QAF might have a smaller size of the pie, they might ending up with more.

3. Foreign Currency Effect

Let’s take QAF’s 2 largest geographical markets – Australia (39% of FY2015 Rev) & Malaysia (28% of FY2015 Rev) .

Over the last 10Y:
– Australian Dollar / Singapore Dollar depreciated from 1.2 to 1
– Malaysian Ringgit / Singapore Dollar depreciated from 2.3 to 3

In local currency terms, revenue had been growing well in the past decade. However, when converted to SGD the results of the past few years have been affected.

On the bright side, the optimistic nature in us could say, well things could turn in the other direction and that would be good then!

SPECIAL MENTION

It was interesting to note that for a company of QAF’s size, there were a total of 14 Directors on Board. More than half of them had ties with either the Salim Family or KMP Pte Ltd Group of companies.

Also, did you know that Wong Fong Fui of Boustead Singapore acquired the near bankrupt QAF in 1988 with all sorts of business from oil exploration all the way to newspapers and concentrated on its only profitable piece – Gardenia. By the time QAF was sold to the Salim Group, it was already one of the region’s largest food business. Additionally, Boustead Singapore Ltd was also the company that sold the Bonjour bread business to QAF back in 2000 for a cash consideration of S$15 million!

THOUGHTS ON VALUATION

Again, this is not a valuation but rather a highlight of some valuation tools that may help in your analysis!

Additionally in QAF’s Annual Report 2015, it was noted that Lin Kejian – son of Andree Halim (Tower Ridge Limited) was granted an option on 11 January 2016 (expire 31 March 2019) to acquire the 47,877,758 QAF shares beneficially owned by Didi Dawis (Chairman) at an aggregate purchase consideration of S$55,000,000. This translated to a price of S$1.14 per share. Something to think about.

Currently QAF trades at S$1.07 with a P/E of 10.7x.

LISTED PEERS

1. Auric Pacific Group Limited
2. FFM Berhad
3. High-5 Conglomerate Berhad

INVESTOR RELATIONS

Investor Relation Material:
Annual Report
Investor Presentations

Email: info@qaf.com.sg

TOP SHAREHOLDERS TOTAL INTEREST (18 March 2016)

1. Andree Halim: 50.24%
2. KMP Investments: 10.21%
3. Didi Dawis: 8.53%

FINANCIALS

Morningstar - Income Statement
Morningstar – Income Statement
Morningstar - Balance Sheet
Morningstar – Balance Sheet

Other Photos: QAF Annual Report

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We will only provide you with information relevant to value investing. You can unsubscribe at any time. Your contact details will be safeguarded The information provided is for general information purposes only and is not intended to be any investment or financial advice. All views and opinions articulated in the article were expressed in Mun Hong’s personal capacity and do not in any way represent those of his employer and other related entities.

Disclosure: As at 16 May 2016, Mun Hong is not a shareholder of QAF Ltd.

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