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qaf

qaf

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Published by Brian Halim

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Published by: Brian Halim on Oct 10, 2012
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Food & Beverages
SINGAPORE
October 9, 2012
IMPORTANT DISCLOSURES, INCLUDING ANY REQUIRED RESEARCH CERTIFICATIONS, ARE PROVIDED AT THE END OF THIS REPORT.
Designed by Eight, Powered by EFA
Man can live by bread alone
QAF offers a tasty dividend yield of 6.6%, which should be sustained bystrong cash flows from its bakery business even though the marginoutlook is soft. An improving Australian pork business increases thechances of divestment.
QAF has also recently expanded its bakery footprint to China. Whileinitial contributions will not bematerial, we like the fact thatmanagement is starting to exploregrowth in the region. Potentialdivestment of its pork business couldadd S$280m-320m to
the firm’s
  value if capital is ploughed intoexpansion of its lucrative bakery franchise.
Consumer staples play withattractive yields
QAF
’s
recent share price support isprobably a consequence of itscash-generating bakery franchise andattractive dividend yield which isdrawing yield hunters like bees tohoney. While we anticipate marginheadwinds and even a slight earningsdip, we continue to expect pricesupport as QAF should be able tomaintain the 5 Scts dividend payoutseen in 2011, taking capex and cashgeneration into consideration.
Growth outlook
The Philippines will be the key growth driver in the near term asQAF expands its Gardenia brandoutside metro Manila. We think thatgrowth in Malaysia could be crimped by a new rival, Massimo, which isgaining good traction with Chineseconsumers. Growth in Singaporeshould remain stable and should trotin line with historical growth. A longer-term growth driver could
come from QAF’s recent venture
intoFuqing, China though management iskeeping a prudent stance, preferringto understand the market beforeputting in significant capex.
Potential catalyst?
 We think that a potential divestmentof its previously-loss-making pork production business could be a pricecatalyst. According to management,
QAF’s Australian pork production
 business has seen a markedimprovement in profitability in2012
early fruits of a change instrategy. This enhances potential fordivesting the franchise.
CIMB Analyst
Daniel Lau
T
(65) 62108614
E
daniel.lau@cimb.com
Kenneth Ng, CFA
T
(65) 62108610
E
kenneth.ng@cimb.com
Company Visit Expert OpinionChannel Check Customer Views
QAF Limited
NOT RATED
QAF SP / QAFS.SICurrent 
S$0.76
Market Cap Avg Daily Turnover Free Float
Target N/A
US$321.6m US$0.21m 25.0%
Previous Target N/A
S$395.8m S$0.26m 524.2 m shares
Up/downside
 
N/A
onvicion
0.500.550.600.650.700.750.8096102108114119125131Price CloseRelative to FSSTI (RHS)
Source: Bloomberg 
1020304050
Oct-11Jan-12Apr-12Jul-12
   V  o   l  m
 
Financial Summary
FYE Dec200720082009201020111H12
Revenue (S$m)1,076.9840.1855.0856.4977.0484.5  Operating EBITDA (S$m)93.536.9103.0110.7123.148.4  Net Profit (S$m)4.6(35.2)56.348.759.218.7  Core EPS (S$)0.01(0.09)0.120.100.070.04  Core EPS Growth-83.7%-683.3%-236.8%-16.4%-25.6%-51.6%FD Core P/E (x)43.6-2.44.46.55.110.6DPS (S$)0.020.020.030.040.050.01Dividend Yield4.5%10.8%5.8%6.3%8.6%1.3%EV/EBITDA (x)5.012.64.54.23.84.8P/FCFE (x)1.2na4.13.93.23.6Net Gearing (x)1.40.50.30.10.10.1P/BV (x)0.680.400.840.930.771.03Recurring ROE2.1%-15.8%22.2%15.3%10.3%9.7%
 
0.76
0.560.78
52-week share price range
Current
 
SOURCE: CIMB, COMPANY REPORTS
 
QAF Limited
October 9, 2012
2
1. BACKGROUND1.1
What’s the story, morning glory?
 Yield sharks have been on the prowl for most of 2012, in search of defensivestocks with high dividend yields. It is, therefore, not a surprise that QAF hasseen very strong price support in recent months as its cash-flow generating bakery franchise across Malaysia, Singapore and the Philippines with highdividend yield (~6.6%) brands it as a defensive, high-yield consumer staple play.
Rivalea, QAF’s pork production business in Australia, started to
turn around inrecent quarters. We previously mentioned that QAF has been looking to divestits pork production business since 2008. A turnaround could enhance thepossibility of a divestment. In our view, this could act as a price catalyst as QAFcould enhance
the firm’s
value by S$280m-320m if freed-up capital is ploughed back into its profitable bakery franchise.
In addition to its defensive nature, we think that QAF’s recent venture into
China could have helped support the share price. In Jul 2012, together with LinKejian (Daniel Halim), son of its major shareholder Andree Halim, QAF set upa joint venture (Gardenia Fujian) to expand its bakery operations in Fujian,China. Entry into a potentially high-growth market like China could haveallayed concerns over growth in mature markets like Malaysia and Singapore.The key investment risk for QAF lies in its ability to sustain its dividend payout.In FY12, emergence of new competition in Malaysia as well as rising wheat andfuel prices should crimp bakery margins and earnings. This should loweroperating cash flow generation. In addition, QAF continues to plough capitalinto expanding and upgrading its bakery lines in Singapore and Malaysia. Inthe coming years, management also sees growth opportunities in thePhilippines which could require additional capex for capacity upgrades andexpansion.In this note, w 
e look at QAF’s historical earnings performance and cash flow 
generation. We conclude that QAF should be able to dish out healthy scoops of dividends to shareholders. This should provide share price support if risk-off sentiment returns. Its attractive valuations also offer limited downside risks.
2. OUTLOOK2.1 Near-term margin pressures...
Bakery costs should increase in 2H12. Fuel and wheat costs are the largestcomponents of the cost base for bakeries.
 As a result, Gardenia’
s (bakery)operating margin is inversely related to wheat and fuel prices. Bad weather inthe US and Russia has led to a 42% spike in wheat prices since Jun 12. Despite weak macro fundamentals, speculation has also helped boost fuel prices.
 
QAF Limited
October 9, 2012
3
Figure 1: Inverse relationship between bakery margins andprice of wheat price, a major cost componentFigure 2: Wheat and fuel price: Climbing wheat and fuel pricesfrom Jun onwards will put pressure on Gardenia's margins
30040050060070080090020022003200420052006200720082009201020111011121314151617181920Wheat (US$)Bakery operating margins (%, RHS)
 
4005006007008009001,000
     J    a    n   -     1     0     M    a    r   -     1     0     M    a    y   -     1     0     J    u     l   -     1     0     S    e    p   -     1     0     N    o    v   -     1     0     J    a    n   -     1     1     M    a    r   -     1     1     M    a    y   -     1     1     J    u     l   -     1     1     S    e    p   -     1     1     N    o    v   -     1     1     J    a    n   -     1     2     M    a    r   -     1     2     M    a    y   -     1     2     J    u     l   -     1     2     S    e    p   -     1     2
60708090100110120130Wheat (US$)Brent crude (US$)
 
SOURCES: CIMB, COMPANY REPORTS, BLOOMBERG SOURCES: CIMB, BLOOMBERG
In addition, Gardenia has been facing stiff competition from Massimo, the new kid on the block. Since its inception in 2011, Massimo, owned by ethnicMalaysian tycoon Robert Kuok, has been very well received by the ethnicChinese population in Malaysia. From its production facility in Port Klang,Massimo
’s fleet of 
200 trucks distribute three products (wheatgerm loaves,sandwich loaves, cream rolls) to provision stores and Chinese medicinal storesin Ipoh, Penang, Malacca and Seremban. This puts Massimo in directcompetition with Gardenia, which generates around 75% of its sales fromprovision shops.Massimo still has a long way 
to go before it can reach Gardenia’s production
scale, product suite and distribution capabilities. Gardenia has five plants and
12 production lines in central Kuala Lumpur compared to Massimo’s sole line
in Port Klang. Gardenia has a 1,000-strong truck fleet; Massimo has 200.Gardenia has over 20,000 distribution points, the largest network in Malaysia.Consequently, operating leverage has made Gardenia the price leader in
Malaysia’s branded bread market. However, with backing from FFM, RobertKuok’s flour
mill, Massimo has been able to wage a price war against Gardeniadespite its lack of scale and reach. For example,
Massimo’
s wheatgerm loaf, which, at RM2.50 is 22% cheap
er than Gardenia’s equivalent wholemeal loaf 
 costing RM3.20, has been taking market s
hare from Gardenia’s
 wholemeal loaf.
Figure 3: Price war - Massimo wheat germ loaf at RM2.50
Figure 4:
… vs
Gardenia
’s
wholemeal loaf at RM3.20
4005006007008009001,000
      J     a     n   -      1      0      M     a     r   -      1      0      M     a    y   -      1      0      J    u      l   -      1      0      S     e     p   -      1      0      N     o    v   -      1      0      J     a     n   -      1      1      M     a     r   -      1      1      M     a    y   -      1      1      J    u      l   -      1      1      S     e     p   -      1      1      N     o    v   -      1      1      J     a     n   -      1      2      M     a     r   -      1      2      M     a    y   -      1      2      J    u      l   -      1      2      S     e     p   -      1      2
60708090100110120130Wheat (US$)Brent crude (US$)
 
 
4005006007008009001,000
      J     a     n   -      1      0      M     a     r   -      1      0      M     a     y   -      1      0      J     u      l   -      1      0      S     e     p   -      1      0      N     o     v   -      1      0      J     a     n   -      1      1      M     a     r   -      1      1      M     a     y   -      1      1      J     u      l   -      1      1      S     e     p   -      1      1      N     o     v   -      1      1      J     a     n   -      1      2      M     a     r   -      1      2      M     a     y   -      1      2      J     u      l   -      1      2      S     e     p   -      1      2
60708090100110120130Wheat (US$)Brent crude (US$)
 
SOURCES: COMPANY WEBSITE SOURCES: COMPANY WEBSITE

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