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"E-book" by AK

Second "e-book".

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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.

Siang Ching Kongf 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

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