At some point in our lives, we may have consumed the Gardenia brand of bread for breakfast, as it is a familiar household name. However, QAF Limited may sound a little more unfamiliar to us. I didn't know about the link between these two names, until I began researching on QAF Limited. 

Gardenia bread is actually produced by QAF Limited, a company whose operating segments include bakeries, primary production and trading & logistics. I had previously written about QAF Limited in May this year.

3rd Quarter Performance

QAF's third quarter results were rather disappointing, with net profit falling by 62%. Even though revenue was flat at $212.4 million, increases in operating expenses resulted in the drastic fall in net profit. Total costs and expenses increased by only 6%, from $192.1 million to $203.9 million. But because of QAF's low net profit margin of 3.52% compared to 9.12% last year, net profit fell by 62%. 

In their Q3 earnings report, QAF did not provide a breakdown of the earnings before interest and taxation (EBIT). Therefore, I had to use figures from Q2. QAF's EBIT for its various segments are shown in the table below.

Source: QAF's financial reports

From 1H 2017's results, it is clear that both the bakery and primary production segments are facing headwinds. After the deconsolidation of GBKL, QAF's bakery segment had reported lower EBIT for both 2016 and 2017. Do note that the 1H EBIT figures for the bakery segment do not include joint venture profits from GBKL. Joint venture profits from GBKL were $0.5 million and $2.6 million for 2Q and 3Q 2017 respectively. 

For the past few years, QAF's earnings growth were mainly driven by the higher selling prices for its primary production segment. This quarter, the lower selling prices for Rivalea was the main reason for the decline in earnings. In Q3, profit before tax for Rivalea fell from $10.0 million to $0.7 million from a year earlier.


QAF has a dominant position in the bakery segment across Southeast Asia. Their Gardenia brand of bread is a consumer staple, and sales are likely to be stable, regardless of the prevailing economic conditions. QAF has also invested in new production facilities, which would increase their efficiency and reduce issues with production.

QAF is still in a net cash position, with $130.8 million in cash and cash equivalents, and total borrowings of $104.7 million. With this strong financial position, QAF has the ability to further expand its production capacity in the region.


Bakery segment faces stiff competition, which has caused QAF to increase its advertising and promotional spending. QAF noted that it had to increase its advertising because of a major competitor entering the Philippines market. Advertising and promotional expenses increased by 81%, or $1.9 million for this quarter.

Declining pork prices in Australia has been detrimental to QAF's profits. According to QAF, Rivalea continues to face an oversupply situation from increased competition, which resulted in lower average selling prices. For the 3rd quarter, profit before tax from QAF's primary production segment fell significantly, from $10.0 million to $0.7 million. This decline was the main reason for QAF's fall in net profit.

According to the Australian Pork Limited's Eyes and Ears report dated 3 November 2017, pork prices have fallen nearly 50% from its peak in January 2016.

Cancellation of Rivalea IPO

When QAF announced that it was cancelling its proposed listing of Rivalea on the Australian Stock Exchange, the market reacted by selling down QAF shares by 3%. I believe that the impact of the cancelled listing should not have a significant impact on QAF's financial position.

Firstly, QAF's justification for listing Rivalea, its primary production business segment, was to enhance shareholder value. However, the proposed IPO price of Rivalea was not at a premium over net asset value, hence the IPO would not have resulted in a significant change in QAF's valuation.

I believe that the purpose of the listing was to capitalise on the rising profits of Rivalea, allowing QAF to divest a portion of its stake at a high.

Rivalea IPO would have allowed QAF to recognise a one off gain, which would have further strengthened QAF's balance sheet. While Rivalea has been QAF's fastest growing segment for the past few years, earnings from Rivalea has been volatile, and reducing its effective stake in Rivalea might have been a positive move.

Future Outlook 

Earnings from the bakery segment were reduced after GBKL was de-consolidated. QAF is still in the process of expanding its bakery production capacity, which would allow it to product more bread. The newer production facilities would also increase efficiency, as the old plant had faced issues with production. 

The oversupplied primary production market in Australia would continue to be a drag on QAF's earnings. While QAF's revenue has remained constant, it would have to keep expenses in check to maintain its profitability.


From a net asset value perspective, I believe that it is unlikely for QAF to fall below its NAV of $0.948, because its dividend yield may provide some support for its share price. QAF has been consistently paying out a dividend of 5 cents annually for the past 5 years, and for FY 2017, it is still on track to meet this dividend payout. QAF's earnings per share for 9M 2017 is 5.2 cents. At its closing price of $1.20 last Friday, its dividend yield stands at 4.17%.

Another point of view might may that QAF could be a potential delisting candidate. A similar company, Auric Pacific, which produces Sunshine bread, was de-listed last year at a valuation of 1.23 times net asset value and a P/E ratio of 28 times last year. I believe this was part of the reason for QAF's surge to its all time high of $1.585 last year.

I would be watching the market's reaction to QAF's results, and ideally, I would want to accumulate QAF shares closer to $1.

Note: At the time of writing, I am not vested in QAF.

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