QAF price have experienced a long term decline from a high of $1.57 in 2017 to 0.755 in 2019. This translates in to an approximately 52% decline in its share price. As a result, dividend yield have creeped up to 6.62% as of date of writing. This article will look into the reason for the price decline and can dividend yield be sustained in the future.
Key Statistics of QAF Limited (Q01)
31 March 2019 (LTM)
Net Income Margin: 0.8%
Current Ratio: 1.6x
Total Debt/ Equity: 29.5%
EBIT/ Interest Expense: 1.2x
QAF have 3 main revenue stream: Bakery, Primary production and Distribution and warehousing business.
Bakery business and Primary production is the main revenue generator for QAF Limited, each segment contributing approximately 43% of revenue and the remaining revenue contributed by its Distribution and Warehousing segment. Approximately 46% of revenue generated in Australia mainly due to primary production segment. 22% from Philippines, 21% from Singapore, mainly due to its bakery segment. Below will be an illustration of QAF’s revenue breakdown.
Earnings before interest and tax (EBIT) for QAF was negatively impacted by Primary Production segment, recording a loss of 8.2m, distribution and warehousing segment have decreased from $5 million in FY17 to $0.2m in FY18. As compared to prior year, EBIT decreased significantly by 80%, from $36.13million to $6.93million.
Gardenia remains to be the number one selling bread brand in Singapore, Malaysia and the Philippines in 2018. Bread is a staple food diet in Asian countries, the recurring sales nature of bread provides predictable profit and cash flow for QAF. The bakery segment remains profitable since year 2004.
Above will be QAF’s Bakery segment revenue & Profit Margin, the revenue generated is relatively constant, showing growth from 2010 to 2015. Note that a significant fall in revenue between FY15 and FY16. This was due to selling of 20% stake in Gardenia Bakeries (KL) Sdn Bhd (GBKL), resulting in deconsolidation from its income statement. For better comparison, FY16 to FY18 will be more comparable. Profit margin have decreased from 10+% in FY10 to FY15, to just 8% in FY18. Due to higher cost of sales, selling & distribution expenses, which can be explained by the increase in revenue contributed from the Philippines, where selling & distribution expenses would be higher.
Overall, there are still growth opportunities for the bakery segment. It is expected that the Philippines will be its main growth contributor for this segment where its bread factory located in Northern Luzon, Philippines have started its operations in December 2018. The full impact of will be felt in FY19 financial statements, Vezted will continue to monitor the growth of QAF bakery segment in the subsequent quarters.
However, Singapore & Malaysia experienced a slowdown in sales due to higher competition and slowdown in consumer spending respectively. It is expected that bakery segment sales in Singapore & Malaysia will remain relative constant in the subsequent quarters.
Primary Production Segment
QAF’s primary production is divided into three of its core businesses: meat production (73%), meat processing (11%) and stock feed milling (16%). Primary Production segment is in a cyclical industry, where product sold are priced as a commodity, where prices fluctuates day to day. Revenue vary significantly from year to year based on demand and supply for its meat products. The main cost of the business are livestock feed. The market of livestock feed is also volatile due to its demand conditions. In FY18, average pig price have declined to approximately A$250. While grain cost have risen sharply from FY16 to FY18 as drought have resulted in a shortage of grain driving up the price of grain.
With rising cost and declining sales price, financial performance have been negatively impacted. In Q1 19, average price of pig have slightly rebounded back to about A$300-A$315, however grain price is still expected to remain high, where drought is still persistent in Australia, and sharply reduced its crop supplies.
As expected, revenue declined from 825.80million to 814.8million, due to lower average pig prices. Cost of materials have increased due to increase in feed cost and increase in depreciation and rental expense due to increase in production capacity in the Philippines. Interest expense is considered a fixed charge, it does not decrease when business is experiencing headwinds. Finance cost is approximately 66% of profit from operating activities, a high proportion of total profits from operations than the norm.
Foreign currency will have an impact to QAF, as the presentation currency of QAF Limited is in SGD while revenue from sales are from other regions. In FY18, AUD have depreciated 7% against SGD, IDR depreciated 2%. The weaker foreign currency rate would result in lower earnings during translation.
Balance sheet of QAF remains stable as compared to prior year, with a decrease in cash due to high capital expenditure of $74.4million during the year and dividend payment of dividend payment of approximately $23.4million, offset by cash from operation of $20.9million.
QAF do not have a formal dividend policy, dividend paid out is based on the firm’s profit and cash generating ability. QAF have maintained its dividend of SGD 5 cents per share since Year 2010. A stable and predictable dividend will be attractive to dividend income investor, however one would need to question its sustainability of its dividend.
With an expected lower cash from operations, high expected capital expenditure, and debt repayments, the cash available for dividend distribution may not be sufficient to maintain a 5 cent per share dividend payout (approximately 23million). Cash balance have also decreased to S$65.6million as of 31 March 2019, representing 8.5% cash to total assets, while in the past cash/total assets have maintained above 10% from FY10 to FY17.
Dividend yield have increased as price declined since year 2017, currently at 6.62%, above +1 Standard deviation of 6.45%. Even with a slight decrease in dividend to 4 cents per share, the yield will be 5.25%, sitting at 3 year mean.
Dividend yield of 6.45% is indeed attractive at current price level, however there are some risks to be aware of.
Bakery segment should experience growth in its top line, due to its expansion in Phillipines, however investors should look into the profit margin, as the margin is declining since FY2015.
With the uncertainty of the primary production segment, the earnings for QAF will be negatively impacted in the subsequent quarters, Vezted will continuously monitor and update on the outlook of QAF and make an update for its Q2 report. As the primary production segment is cyclical in nature, a better outlook for its primary production segment will present QAF as an opportunity to purchase at current book valuation, as QAF 3 year P/B average is below -1 SD of P/B.
Investors that have a long investment time horizon can consider this counter to recover(assuming a 4 year cycle in primary production segment) and enjoy an above average dividend yield while waiting.
Note: currently am not vezted in QAF Limited(SGX:Q01).