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QAF's 2Q17 profit after tax fell 72%.

Wednesday, August 9, 2017

Part of QAF's large decline in earnings should not come as a surprise since, one year ago, in 2Q 2016, QAF recorded an exceptional gain of $9.7 million from reducing its stake in Gardenia Malaysia (GBKL) to 50%. 

If we were to exclude that exceptional gain, however, profit after tax still reduced by 58%, year on year. Not as bad as 72% but still rather attention grabbing.

Singapore and Malaysia

QAF's share of profits in Malaysia is reduced because of its smaller stake in GBKL. However, the reduction is bigger this quarter compared to the last quarter.

It was revealed that QAF experienced issues in its Johor production plant. This affected sales volume not only in Malaysia but also in Singapore. 

Otherwise, QAF would probably have done better in both countries. There were also some one off cost items due to problems at the said plant.


The bakery business in the Philippines is doing well but incurred higher marketing and distribution costs. It was revealed that although costs are heightened, the bakery business achieved higher sales and increased market penetration in the country. 

Looking at the Income Statement, Other Operating Expenses saw the biggest increase of 23% and it was revealed that most of this big increase is due to higher marketing costs in the Philippines. This is also a market in which QAF is planning to expand its footprint.


The bakery business in China is still losing money but losing less money. Narrowing losses is good news but if it continues to bleed, it might be a good idea to shut it down. QAF will decide by end of the year if it should continue its business in China.


QAF's pork business in Australia saw a 20% reduction in selling price due to an over supply situation which led to downward pricing pressure. 

The demand for pork is still healthy but the over supply will take time to resolve. It is hard to say how long the situation might persist but I doubt that it is enduring. 

The situation is probably more cyclical than structural.

One quarter does not make a year. It is reasonable to wait and see if QAF is able to recover earnings in the coming quarters as it pursues growth.

To be realistic, however, any recovery could take some time to materialize as new production plants are built. Also, it is my guess that many of the increases in costs and expenses are going to be sticky.

Having said this, note that QAF is meeting the challenges from a position of strength as its balance sheet remains strong. 

Cash and cash equivalents also increased year on year from $97 million to almost $126 million. 

QAF has a good track record and I like to think that the managerial competence is more enduring than the challenges being faced.

Even with reduced earnings in 2Q 2017, QAF is capable of maintaining a 5c DPS but it is harder to say if a reduction will happen or not. With this in mind, while waiting for improvement in performance, I look forward to being paid.

If Mr. Market were to send QAF's share price tumbling, it would be an opportunity for me to accumulate a larger position in a competently run and financially sound company which is likely to do better again in future.

If there should be a decline in share price, I hope it is a big one of, say, 10% or 20% and not just another dip.

See announcement: HERE.

Related post:
Wondering about QAF Limited.


laurence said...

I'm confident in your proven Midas touch. Just a matter of time before it turns to Gold.

AK71 said...

Hi Laurence,

Simi Midas touch lah? I blur. -.-

However, it must be said that I am able and willing to wait for years, if required. This is not for the impatient. ;)

Kevin said...

Hi AK,

Rivalea is going for listing on the ASX to shore up some funds for the group. My guess is they might feel that they are losing market share as it produced approximately 17% of Australia’s total pork production in 2016. To makes matters worse, the oversupply issue also adds to its woes. ;)

Vested and ready to accumulate if it dips further. ;)

My only concern is Mr Halim delisting it if Mr Market values his company too lowly and it gives him an opportunity to delist it at an attractive price. :P

AK71 said...

Hi Kevin,

If only we had perfect knowledge. ;p

I can only hope to be approximately right. That is better than being absolutely wrong. ;)

laurence said...

Quote: "My only concern is Mr Halim delisting it if Mr Market values his company too lowly and it gives him an opportunity to delist it at an attractive price."

This won't surprise me one bit as many of AK's picks had or are in the process of being bought out/delisted. The proof is in the pudding ..... I mean....the Bread.

Ksc said...

Hi AK,

"The Proposed Listing will not result in Rivalea ceasing to be a subsidiary. Upon the Proposed Listing, it is
expected that the Company will receive A$52 million arising from the repayment of a shareholder’s loan"

Any idea what does this A $52mil means?


AK71 said...

Hi Siang,

My best guess is that a loan was made to Rivalea by the Company and this will be repaid from proceeds received from Rivalea's IPO's proceeds. Just a guess. :)

AK71 said...

Hi Laurence,

I would enjoy a good bread pudding anytime. ;p

However, I hope QAF sticks around for many more years to come.

AK71 said...

Wong Yao Keng:
Hi AK, can you talk about what it means to shareholders to spin off a business, like what QAF is planning to do with Rivalea? Since Rivalea will remain as a subsidiary, isn't it the same?

If they are able to get a higher valuation for Rivalea, then, they could get more capital to run the business without increasing debt. They want to expand a plant which is already running at full capacity and they also have some growth initiatives which need funding.

AK71 said...

Zi Cong Chai:
Hi AK, are you concerned abt the sudden drop in profits from their JV in GBKL compared to 2Q 16? I see they say there is increased in headcount and management fee from their JV partner.

This is one of the costs which could be sticky. After 1MDB, I am not surprised by what happens in Malaysia anymore. :p

blazingruby60 said...

hi AK
there is some new development re:QAF..i dont understand what it means by QAF listing IPO on meat business in Australia and selling Gardenia in SEA. Does that mean QAF ceased to exist? Is that privatization?

AK71 said...

Hi Ruby,

QAF is listing their primary production business in ASX. It means that QAF will become a shareholder in the new entity.

I don't know if they are selling away their bakery business but I know they sold a big stake in Gardenia Malaysia some time ago.

laurence said...

Finally good news fm QAF after an eternity of waiting:

QAF Limited said on Wednesday morning that it plans to retain a controlling interest of at least 51 per cent in the meat business it is planning an initial public offering (IPO) for.

The IPO will take the form of an offering of shares on the Australian Securities Exchange (ASX) in Hamsdale Australia Pty Ltd, to be renamed Rivalea Limited.

The proposed listing will include the group's primary production business, with assets located in the Australian states of New South Wales and Victoria. Operations include seven owned pig farms, 19 contract pig farms owned by third parties, three feedmills, two pork processing plants and two grain storage facilities.

The proposed listing's revenue for the first half of 2017 was S$199.8 million, with net profit at S$9.9 million.

Based on various assumptions, including a market capitalisation of S$224.1 million for the listing, S$88.8 million raised by selling new shares to the public, and S$21 million from selling current shares, and expenses of S$8 million excluding cash bonus to senior employees, QAF will recognise a gain of S$8.5 million to its equity after the listing of 49 per cent of its interest.

AK71 said...

Hi Laurence,

Thanks for sharing the news. :)

Kevin said...

Hi AK,

This blog says that you have dropped QAF as its share price declined quite a bit recently. Is that true? :P

AK71 said...

Hi Kevin,

"I have dropped QAF as its share price declined quite a bit recently. It was a marginal $100K position."

Translated, it means that I am still invested in QAF but it is no longer an investment that is worth $100K or more as its share price has declined. So, it has been dropped from the list.

Kevin said...

Hi AK,

My english and understanding needs to improve. ;P

How are you going to deploy the $200,000 - $349,999 Croesus Retail Trust's funds since Blackstone's takeover is confirmed?

Keeping cash or go on shopping spree? ;)

AK71 said...

Hi Kevin,

You would be interested in this blog:
How to deploy the Croesus Retail Trust money?

AK71 said...

Reader said...
I read (from some other interview, can't remember source) that you
have divested your shares of QAF?

I am still reading and understanding the gist of the spin-off of its
Aussie pork business ("Rivalea").

Based on the pro-forma EPS of 16.6cents a share, even a $1.23 share
price is a PE of about 7... which looks cheap. I think the pork
business will only improve since pork prices was low, so this
pro-forma EPS might be overstated.

I am a very new and small investor to QAF, is there something that
prompted you to sell?

AK said...
OK, I think I know where you read that.
You might want to go to this blog and read the comments section (i.e. comment from Kevin and my reply):

AK71 said...

Recently, QAF announced plans to list up to 49% of its primary production business on the Australian Securities Exchange (ASX) for approximately S$88.8 million. I attended the QAF EGM last week to understand the management’s rationale for the proposed listing and its potential impact on shareholders.

1. QAF’s earnings per share will drop from 21.4 cents to 16.6 cents illustratively if the proposed listing goes through. A shareholder was concerned about the lost income and asked how the management plans to replace it. Managing director Goh Kian Hwee replied that the illustration assumes a public flotation of 49% but there is no certainty that will happen. If the demand isn’t there for the IPO, QAF may have to scale down the size of the proposed listing to between a 20% and 49% equity stake. ASX rules require at least 20% in free float. At the same time, QAF has the intention to continue growing its bakery business to grow its earnings.

2. The management said that part of the IPO proceeds will be used to repay loans. But they haven’t yet decided how to reinvest the IPO proceeds or whether a portion will be paid out to shareholders. The picture will become clearer when they know how much of the business will list.

3. The management believes the proposed listing will improve QAF’s valuation. Independent director Dawn Lum explained that QAF’s bakery and pork production are two different businesses and separating them will make it easier for the market to value QAF. Mr Goh added the listing will provide more transparency for valuing QAF’s businesses and avoid a potential conglomerate discount to QAF shares.

4. A shareholder pointed out that QAF was listing its primary production business near its book value and questioned the purpose of listing in the first place since there was no premium to the shares. Mr Goh replied that QAF will still own 51% of the primary production business and, hence, enjoy any future upside. At this, the shareholder countered that QAF might as well keep the entire business and enjoy all the upside. Mr Goh shared that there’s a strategic reason for the listing – one of which is to motivate the management of the primary production business to grow the business further.

5. The shareholder also asked for the management’s view about the primary production business as it hasn’t performed well over the long term. Mr Goh agreed that the business struggled in its initial years as it is a commodity-based business. But the business has evolved and now produces higher-end products. He highlighted that results have improved over the last three years and will, hopefully, continue to grow.

6. A shareholder questioned if this was the best time to list as pork prices have dropped 20% this year. He proposed waiting for pork prices to recover to achieve a higher valuation for the listing. Mr Goh explained that it takes 6-9 months to prepare for a listing on the ASX and there is no way to know which way prices will go during that time. Rather than trying to catch the market, the management feels it is better to list now considering that the primary production business had a record year in 2016.

7. The management revealed that they explored a private placement for the primary production business. But in the end, they decided, on balance, that it was better for the business to do an IPO.


Wei Yi said...

Hi AK,

I appreciate your conservative approach to QAF Ltd. As you mentioned there are near-to-mid term negatives facing the company:

Decline in EPS from:
- De-consolidation of Gardenia Malaysia business
- Spin off of Rivalea
- Increase in costs from Philippines

Good to reduce/exit position and wait for more clarity before deciding what to do next.

Regarding the "strategic review" of Rivalea business i.e. listing on ASX is just a nice way of saying that they are finding a way to reduce their exposure to Rivalea business probably due to:

1) Increased tax burden going forward for Rivalea biz ~30% of profits. Note that this biz has been using the tax credits from previous losses until now. I suspect that a big reason for the timing of the IPO is due to this factor

2) Reduced profitability of Rivalea business going forward. Combination of decline in pork prices + increase in competition has reduced margins of this business

The shareholder at the 2017 AGM was correct to point out to mgmt. If Rivalea was such a
great business, why not keep 100% of it? Also note that valuation is close to book value. So the decision to IPO it would give a good indication of the value of Rivalea business.

I would watch carefully on the demand of the Rivalea IPO.

I am not positive that the demand for this IPO will be strong. Implications of poor demand of the IPO would be QAF holding a higher % stake in Rivalea (More than 49%) --> a negative for QAF.

Not vested. Will wait for prices to come down further before deciding what to do next :)

Noted that you got in at an attractive price of ~S$1 :)

AK71 said...

Hi Wei Yi,

Thanks for sharing your thoughts. Much appreciated. :)

The oversupply of pork in Australia could last for a while and, in such an instance, QAF's earnings could come under pressure.

Yes, although I did average up my investment in QAF earlier this year, it is good that readers remember I first became an investor at under 70 cents a share and increased my investment at $1.03 a share too.

AK71 said...

Reader said...
What's your take on this, AK ? I think this will negatively affect QAF's share price.

Pulled pork as Rivalea calls off IPO
The Australian, November 7, 2017

The curse of the failed float has hit again: pork producer Rivalea has pulled out from its planned initial public offering in another sign that equity capital markets remain under pressure.

The company owned by Singapore’s QAF had been using Morgans to prepare it to float next month. It had been expected to raise up to $100 million and was likely to be valued around $200m.

A non-deal roadshow was held in July and there was the expectation that QAF, a Singapore-listed food company, would keep 51 per cent of Rivalea once it was listed.

Rivalea has seven pig farms, 19 contracted farms, three feedmills, pork processing and two grain storage businesses.

Marketing of the float had been under way for the past few months and the hope was that prospective investors would be drawn to the operation on the back of popularity in the consumer sector.

Rivalea, previously part of Bunge in Australia, also owns Family Chef, Eggstra and Riverlea Australia.

The price expectations of the vendor, and its advisers, seemingly differed from the market and fund managers, which is why the float was shelved.

AK said...

Very unfortunate.

Definitely sounds more negative than positive.

I wouldn't be surprised if the share price suffers some downward pressure.

john said...

Hi AK,

Had the news affected your long term views of QAF?

AK71 said...

Hi John,

Well, fundamentally, the businesses are OK.

However, the oversupply of pork in Australia is an issue that will take some time to be digested. How long would it take? I don't know exactly, for sure, but it could take a few years.

So, I believe that weaker performance as a whole is to be expected.

This is something investors in QAF must be aware of and ready to accept.

AK71 said...

Following a strategic review, breadmaker QAF said it had decided to cease its bakery operations in China, which continue to be loss-making. The Chinese bakery operations are undertaken through a 55 per cent held subsidiary of the group, with the remaining 45 per cent held by a company in which controlling shareholder Lin Kejian has an interest.

"The proposed cessation is not expected to have any material impact on the net tangible assets per share and earnings per share of the group for the current financial year ending Dec 31, 2017," it said.

The Straits Times

Betta man said...

Looks like the poor showing persist into Q4. Luckily final dividends maintained. Any concerns ?

AK71 said...

Hi betta,

I said this to another reader in another blog post:

"We have to ask if the bad news is about permanent and enduring changes in the business or whether it is cyclical or a one off thing. Then, we will have our answer."

Same same here. ;)

AK71 said...

Reader says...
Qaf recent results showed dip in profit.
I happen to see a recent write up of QAF, on a scale of 0 (weak/ poor) to 100 (strong/gd), QAF is rated as follow:-

Growth Opportunity (16)

Recent Business Performance (0)

Financial Strength (100)

Return to Shareholders (10)

Competitive Advantage (62)
Debt Level :-
Low Long Term Debt

Revenue and Earning:-
Revenue decline from 2014-2017

Operating Margin:-

Recent Business Performance:-
Earning decline 73.55% in the last year

It seems like QAF business is starting to slow down .. Today the price gapped down from previous day close & looks like it cud head further south.. Hope u can review its current financial opn & comment if it is still a good stock to buy for dividend yields?


AK says...
We should ask if the problems now are temporary or enduring. If we believe that they are temporary, then, a strong balance sheet will help QAF weather the tough times. 😉

tangara said...

Hi Ak,

Do you still hold your views that the problems of QAF is temporary, now that the share price has dropped further?

AK71 said...

Hi tangara,

I believe that the oversupply of pork in Australia is a cyclical issue and the downturn has to be temporary.

If we believe that the issue is structural (e.g. change in consumption patterns), then, the pork business could be kaput.

Do what you feel is right.

tangara said...

Thanks AK71 for your reply.

My only worried is that most stocks go thru some kind of cycle but the wait for the cycle to ends could be very long. In the past, when oil was booming, it sort of made the oil related industries buoyed. But, now look at those companies, it is now reduced to a stage where it never see the light at the end of tunnel.

I just wonder how temporary is for this counter. Can shed some light on this?

AK71 said...

Hi tangara,

I don't know how long the down cycle is going to last.

Look at Wilmar's down cycle, for example.

It has lasted for many years.

However, I have stayed invested and even added from time to time as I believe that the cycle will turn up again eventually.

If we are not willing or able to hold our position, for peace of mind, it is probably a good idea to reduce.

AK71 said...

3Q 2018: Wilmar.

Rae said...

Hello AK.

Possible to talk to yourself on qaf. :)

AK71 said...

Hi Gerald,

Nothing new to say, really.

3Q 2018 QAF.

That sums it up pretty well for me.

Invest Sg said...

QAF (source: Maybank KE highlights)
- Updated that the ongoing bushfires in south-east Australia have not affected its primary production business or operations to-date.
- Rivalea Australia’s business is located principally in southern New South Wales and Victoria and its largest farm in Corowa is 160km away from the nearest blaze.
- But there are some restrictions on visibility and stock feed delivery due to smoke and road closures.
- All employees and herd are safe and its property, liverstock and business are covered by insurance against bushfire risk.
- Rivalea has provided relief efforts to support firefighters and bushfire victims through funds and donations of pork products for distribution to local communities.
- Trades at 49.4x trailing P/E.

AK71 said...

Hi Invest Sg,

Thanks for sharing the update. :)

Rae said...

Hi AK,

I've loaded this loti (bread) in yr 2016.
Since then business took a turn till recently when things getting bright abit i loaded again.

If possible, can you talk to yourself again. ?
Thank you.

AK71 said...

Hi Rae,

I don't have anything new to say about this, really.

The pork business in Australia was hit by a cyclical downturn and it has lasted longer than expected.

It reminds me of the cyclical downturn in the oil and gas industry that has hit even heavyweights like SembMarine and SembCorp hard for many years.

Of course, if the decline is not due to cyclical reasons but structural reasons, then, it is game over.

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