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QAF's earnings down but cash increased. What is this?

Wednesday, December 13, 2017

Reader says...
Thanks for talking to yourself!

Really helpful in terms of long term planning for FI.

Just wanted to get some of your thoughts on QAF..

Latest results show much lower earnings (~60% less), and the stock price took a hit..

However, i see that their cash on hand has increased quite a lot.

With all the other news about it i.e. IPO not proceeding..

Could you talk to yourself on this?

AK says...
The weakness in earnings is probably cyclical (due to oversupply of pork in Australia).

So, I am waiting to buy more if Mr. Market should go into a depression.

You might want to read the related posts at the end of this blog.

Reader says...
How would you define a depression for them, and how would you conclude that their mgmt is taking the right steps? Thanks!

AK says...
If we accept that the weakness is cyclical and not structural, then, we understand that earnings will recover. 

It could take months or years but it will recover.

To be able to weather cyclical downturns, a company must have a strong balance sheet. 

This is what Marco Polo Marine has taught me. 

QAF has a strong balance sheet.

A company could become more valuable over the years but due to downturns which could be prolonged, its stock could trade at relatively low prices. 

That would be a good time to accumulate. 

This is what Wilmar has taught me.

QAF is more valuable today than it was a few years ago.

As for the management, I let their track record speak for them. 

Holding a relatively large controlling stake, they are driven to make QAF more and not less valuable.

Reader says...
I'm still young and willing to wait for recovery, just want to be certain of my decisions 🙂

1) Could i ask why you believe the downturn is cyclical?

Thanks for your time!

AK says...
The primary production business is a commodity business.

This is similar to Wilmar's businesses in agriculture.

This is a cyclical business.

I am referring to QAF's pork business in Australia, of course.

Related posts:
1. Plunging earnings at QAF.
2. Wondering about QAF.


AK71 said...

Reader says...
I don't really understand the pork business, but I'm curious why you say it's cyclical. I thought the demand is quite stable and predictable, & thus the farmers can plan their supply accordingly. Can you share a bit about this please?

AK says...
Commodity business is usually cyclical... demand high, produce more and usually will have overproduction... then, scale back supply and leads to undersupply... can never be exact.

This is because there are usually many producers and they are not going to talk to each other to plan their production to achieve optimum supply.

In a world of perfect competition and imperfect knowledge, there is bound to be cycles.

csky said...

Hi AK,

Do you mind sharing if you sold any when it went to around $1.5? If not, how do you not feel heart-pain or beat yourself up for not selling before it turned downwards? Afterall, if one manage to sell at $1.5, now they would have more capital to buy more...

Hope I can learn to have a more resilient heart and mind like you!

AK71 said...

Hi csky,

It shouldn't matter to anyone if I sold or bought anything.

We have to be clear what we want and what we do will have to match.

I am investing mostly for income and I have an idea of what an investment is worth. So, there is no reason to sell unless things have changed.

Hindsight is always perfect. After so many years as an investor, I no longer let such things affect me. ;)

AK71 said...

Hi csky,

You might be interested in this blog:

Should I sell to lock in gains?

AK71 said...

And maybe this too:
Luck plays a part in investing.

As long as we make more than we lose, we should be OK. :)

AK71 said...

Don't worry. Don't regret.

csky said...

Hi AK,

Thank you for sharing all the links. Guess I am a confused trader/investor who mixes trading and and investing.

I was asking cos I was wondering if there's any position sizing strategy such as those you shared for Sembcorp Industries. Like nibble a bit, then if it goes down, can buy some more. I thought you might have some sort of reverse strategy, so when price goes up and seems to come down, you will sell some and wait to buy more if it drops :p

Hopefully with a few more years of 磨练, I can figure this out a bit better.

AK71 said...

Hi csky,

You are in luck. I shared what I did with SCI in 2015 as a trader investor.

There is nothing wrong with being a trader and investor if we are very clear as to what we are doing.

You are not wrong to assume that time is the best teacher.

Accumulated experience is most valuable and not always transferable. :)


Jason Wong said...

Hi AK,

Do you think the demand for pork in China will push Rivalea's business in Australia?

As I recently saw a news about China closing many domestic pig farms due to nationwide drive to curb pollution.

AK71 said...

Hi Jason,

Frankly, I have no idea.

It would depend on what strategy Rivalea adopts going forward.

Generally, in a situation of oversupply, the bigger players will prevail.

The market will right itself over time.

AK71 said...

Reader says...
Can you talk to yourself on QAF on it's market outlook? Wththr its business is still doing fine to pay the 4+% yield..?

AK says...
My idea on QAF has not changed. Nothing new to say.

JJ said...
This comment has been removed by the author.
JJ said...
This comment has been removed by the author.
AK71 said...

Hi JJ,

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.

Betta man said...

Any cause for concern ? Looks like a huge dive in earnings.

Unknown said...

Are u nibbling QAF at this price? Was thinking to accumulate on weakness...

AK71 said...

Hi betta man,

Things do look very challenging for QAF.

It is probably better to take shelter and wait for the storm to pass.

AK71 said...


No money liao.

I put most of my money in ComfortDelgro and SingTel in recent months. :p

Betta man said...

QAF is trading at 0.855 cents at point of writing. This is below NAV of 93.9 cents. If dividend of 5 cents is maintained, this represent a dividend yield of 5.84%. Do you think value is emerging for QAF at current price ?

AK71 said...

Hi betta man,

At this price, I don't think it is expensive.

Operationally, it is still strong although it is facing some challenges.

If past track record is anything to go by, I think QAF should weather the cyclical weakness in Australia well enough.

Betta man said...

profits continue to fall. Luckily interim dividend of 1 cents is maintained. EPS for Q2 is only 0.2 cents compared to 1.5 cents in 2017. Do you think QAF's DPU of 5 cents can be maintained ?

AK71 said...

QAF continues to face challenging conditions.

Although QAF is still able to sustain a DPS of 4c or even 5c based on the strength of their balance sheet, we should be prepared for a lower DPS which could be the prudent thing to do.

Betta man said...

Trading at $0.745 at point of writing, below NAV of $0.939. I believe there is now value at current price.

AK71 said...

Hi betta man,

With the lower price, there is more value for money now. ;)

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