QAF’s Business Model
QAF Ltd has several business segments- Bakery, Primary Production, Trading and Logistics, Cold Store Operations and Others. Because QAF’s profit and revenue are significantly influenced by only its bakery and primary production segments, this initiation report would only focus on these 2 segments.
Its bakery segment is primarily engaged in bakery manufacturing and distribution of familiar brand names such as Gardenia and Bonjour.
Its bakery segment has a presence in Malaysia, Singapore, Philippines and Australia. It is a market leader in Malaysia, Philippines and Singapore. Specifically, its main competitor in Singapore is owned by another listed company in Singapore, Auric Pacific, which distributes bread under the Sunshine and Top One brands.
The other critical business segment is Primary Production where QAF owns the largest fully integrated pork production business in Australia under the Rivela brand. Rivela has up to 17% of Australia’s pork production. A simple supply chain can explain how the fresh pork, ham and bacon that we see in supermarkets are derived from farm to table.
Diagram 1: QAF’s Rivela Pork Production Supply Chain (Source: OCBC Report)
QAF owns stockfeed mills that produce all of Rivela’s stockfeed requirements and will send the stockfeed to feed the pigs in its farms and third party farms. Its slaughterhouse will debone, pack and send trays of pork to supermarkets and to be exported. Therefore, it is not difficult to understand how having control over the entire supply chain allows QAF to control operating efficiency, cost and selling price. Let’s assess how QAF fare in terms of Fundamental Analysis.
Investment Merits of QAF
Solid financial track record
QAF has a proven track record of turning in slow and steady increase in profits underpinned by stable revenue. Maybe this can be attributed to the fact that people would always eat bread and pork, regardless of the economic situation. Some may think that its results are boring and unspectacular, but they are deemed attractive enough to have caught Heartland Boy’s eyes. In particular, since 2014, its primary production has turned in higher profits due to increased sales volumes and selling prices, as well as lower operating costs.
There is evidence that shareholders can expect this to continue as QAF has turned in another set of commendable results for 1Q2016, with net profit increasing 25% year on year as it further entrenches its leadership in the markets that it operates in.
Table 1: Stable Revenue, Increasing Net Profit and Net Operating Cashflow of QAF
Increasing Gross and Net Margins
Perhaps, it is most pleasing to realise that QAF’s gross and net margins are on an uptrend since 2013. Furthermore, QAF’s gross and net margins are also superior to its most direct competitor, Auric Pacific.
Growing Return on Equity
Heartland Boy is only prepared to accept an ROE of 12% for any of the stocks that he has invested. QAF has recently crossed this threshold by registering an ROE of slightly over 12% in 2015. For other financial ratios, readers may refer to Yahoo Finance.
Table 2: Improving Gross and Net Margins and Growing ROE of QAF
Negligible Net Debt Situation
With interest rates forecast to increase in 2016 and beyond, QAF is in an enviable position of having the flexibility to utilize its cash to repay almost all of the loans it has undertaken. Its net debt position is a negligible S$ 100,000. Peanuts for a company with a market capitalization of over S$600 million!
High Dividend Yield
At a stock price of $1.1, it has a dividend yield of 4.6%. Generally, it pays dividends twice per fiscal year.
Sustainable Competitive Advantage
QAF’s competitive strengths, especially in the bakery segment, lies in its branding power as well as the extensive distribution network that it controls. This has allowed Gardenia to command 60% of the packaged bread category in Singapore. To further entrench its competitive advantage, Gardenia Foods was also the first local bakery to be awarded the prestigious Platinum Award by Agri-Food & Veterinary Authority Singapore (AVA) for achieving Grade A status in the Food Safety Excellence Scheme for 20 consecutive years!
It is also important to note that its dominance and brand equity is not just restricted to the Singapore market. For instance, its subsidiary, Gardenia Bakeries Sdn Bhd was once again voted the “Most Preferred Brand” in a nationwide survey on Malaysian consumers.
Good Growth Story
QAF recently constructed a new factory in Philippines and this could not have come at a better time as its existing factory in Philippines is already running at full capacity. This allows QAF to bring in its premium brand, Bakers Maison, into Philippines as it rides on the growing middle class’s aspirations for artisanal bread. The increased capacity will allow QAF to penetrate deeper and wider into the expanding modern grocery retail channels in Philippines.
Investment Risks of QAF
Susceptible to fluctuation in prices of raw materials
With regards to the rearing of pigs, Rivela is particularly susceptible to fluctuation in prices such as wheat, barley and grains that are all necessary to produce the pigs’ stockfeed. While Rivela attempts to mitigate this by directly purchasing them from local growers, it will be prudent to observe the prices of these raw materials in light of the El Nino phenomenon. Heartland Boy often refers to the Australia Bureau of Agricultural and Resources Economics to check out feed outlook for grain prices, as well as global wheat prices, another critical raw material needed for QAF’s bakery segment.
As a company that operates in several markets, it is inevitable that QAF is subject to foreign exchange risk. For instance, it recorded lower revenue in 2015 in Singapore Dollars terms although it actually achieved higher sales in Ringgit for its bakery segment. This is due to the drastic decline in the Malaysian Ringgit vis-à-vis Singapore Dollar. Therefore, it would be mindful to pay attention to both Malaysian Ringgit as well as Australian Dollar.
Conclusion of QAF
Everybody eats bread and QAF is indeed a good defensive stock to have in one’s portfolio in today’s highly volatile market. Heartland Boy is an extremely satisfied and loyal customer of Gardenia brand and is always impressed by the new products rolled out on a frequent basis. For instance, the recent chia seed wholemeal bread should be a winner, especially with the recent negativity surrounding refined carbohydrates as well as the clamour for superfoods. Heartland Boy cannot help but think that he is contributing to QAF’s coffers every single time he buys a loaf of Gardenia wholemeal bread for his weekly breakfast. Guess it is still possible to have your bread and eat it too.
Heartland Boy has a share price target of $1.4 on QAF Limited.
Vested in QAF shares at 1.05 cents since May 2016
This article was written on 12 June 2016.
Posted some of my questions in another forum but was deleted.
Not sure if it is just me but after looking at their annual report there are something puzzling on their directors and board composition. Some questions for shareholders to think over
1. Both Tan Teck Huat and Dawn Pamela Lum were appointed on 12 February 2016. Tan Teck Huat subsequently became executive finance director of QAF, and Dawn Pamela Lum became lead independent director in January 2018. Both of them previously worked in the same company, GuoccoLand for over 5 years.
How did the NC ensure that there is real independence given past working relationship of Tan and Dawn?
The rule 720(6) disclosure released by QAF on 26 March 2019 did not disclose the date of appointment of Tan Teck Huat. Not something on purpose I presume?
2. Dawn Pamela Lum is the chairman of Remuneration Committee. Tan Teck Huat is a member of exco.
Does Dawn participate in the deliberation of the remuneration of Tan Teck Huat? Not sure what is the process involved here. Who came out with the amount payable to Tan? Was it Tan that recommend his own pay for Dawn to approve?
How then did the Remuneration Committee arrive at the amount of director’s fees? Did the management involve in the process of making recommendation on the amount of director’s fees to the Remuneration Committee? Tan Teck Huat is part of management I presume.
3. Goh Kian Hwee (the Joint Group Managing Director) and Ong Wui Leng Linda (independent director who is also the chairman of Audit Committee), both sit/sat on the board of another listed company, Hwa Hong Corporation Ltd.
Was Linda identified and recommended by Goh to the board of QAF? What steps were taken by the NC to ensure Linda is independent if she was recommended by Goh to the board of QAF?
4. Goh Kian Hwee was from a law background, with experience in corporate and capital markets law. He was previously a director of other listed companies in Singapore.
Does he even have any background or experience at all in managing business other than in law? If not, was there any assessment done by the NC to conclude that his qualification, background and experience in law can fit in the role of the managing director (who is supposed to direct and manage the business of QAF)?
5. There are 2 Joint Group Managing Directors, Lin Kejian and Goh Kian Hwee. Goh Kian Hwee received between $2 million to $3 million in FY2017 and FY2018. Lin Kejian elected not to receive remuneration. An article published in Business Times dated 16 Mar 2019 mentioned that CEOs of large companies had a median remuneration of $3.41 million in 2016, whilst medium-sized company CEOs were paid $1.25 million.
Are both Lin Kejian and Goh Kian Hwee subject to a fixed contract term as the Joint Group Managing Director of QAF? Is there a fixed remuneration to be paid to Goh Kian Hwee’s during the term of his contract?
If there is no fixed remuneration for Goh during his contract term, does the Remuneration Committee assess and determine annually as to the remuneration of Goh? How did the Remuneration Committee assess and determine the remuneration package of Goh?
Is that remuneration package in line with market practice for a candidate with no prior experience? Were there any studies done in determining the remuneration package of Goh Kian Hwee? Is he overpaid as Joint Group Managing Director of QAF?
6. The performance of QAF appears to be declining since 1 January 2017 due to various factors. On page 72 of QAF 2018 Annual Report, it was disclosed that the remuneration committee determined the remuneration packages of executive directors based on various factors including individual performance and contribution.
What has the management team achieved so far in the past 2 years since they came in 1 Jan 2017 in terms of growing the business of QAF? If the performance of QAF continues to decline over the next few years, will Goh’s remuneration still remain in the band of $2 million to $3 million?
Given the fact that Goh and Tan are receiving remuneration as executive director of QAF, what have both of them achieved in the past 2 years to achieve long-term sustainable growth and value creation (as disclosed in their annual report page 72)? What have both of them achieved so far for the Remuneration Committee to determine and conclude they deserved to be paid so much?
7. 2016 annual report and earlier annual reports disclosed that the CEOs of subsidiaries as key management staff. Past 2 years, these CEOs information were no longer disclosed in the report. I thought this disclosure is required after looking at other listed companies annual report. Dont think it is fear of competitor poaching as competitors can find out from announcement or past annual reports anyway. Maybe these subsidiaries CEOs no longer considered to be key management staff anymore?
8. On page 67 of 2018 Annual Report, it was disclosed that 4 non-executive directors elected not to receive director’s fees.
Why these directors elected to do so? Was it because of the declining performance?
If it is due to declining performance, how did the Remuneration Committee then come to a conclusion to recommend the such attractive remuneration packages for Goh Kian Hwee and Tan Teck Huat? Didnt the Remuneration Committee take into account the declining performance of the Group when assessing their remuneration package?
9. On page 85 of 2018 Annual Report, QAF said that it encourages shareholders to regularly communicate with the company through the designated email address of QAF at infoqaf.com.sg. The email address is not even valid for me to reach out. What is the correct email??
QAF AGM is coming and I will definitely be raising most if not all of these questions to the board in their AGM.