Latest Earnings from QAF Limited: Profit More Than Doubled

QAF Limited (SGX: Q01) reported its fiscal second-quarter earnings last Friday evening.

As a quick background, QAF’s business interests can be divided into four major segments, namely, Bakery, Primary Production, Trading & Logistics, and Investments & Others. The company is perhaps best known by consumers in Singapore for its Gardenia brand of breads found commonly in grocery stores. Geographically, the majority of QAF’s revenue comes from Singapore, Malaysia, Australia, and the Philippines.

Financial highlights

The following’s a quick summary of some of the latest financial figures from QAF:

  1. QAF recorded revenue of S$208.4 million, a 17% year-on-year decline from S$252.4 million a year ago.
  2. Despite the fall in revenue, profit attributable to shareholders surged by 136% to S$28.8 million. QAF had benefitted from a one-off gain of S$9.7 million (more on this later), but even if that was stripped out, the company’s profit before tax would still have increased by 29.6% from S$15.9 million in the second-quarter of 2015 to S$20.6 million in the reporting quarter.
  3. As a result of the big jump in profit attributable to shareholders, QAF’s earnings per share (EPS) followed suit, spiking from 2.2 Singapore cents in the second-quarter of 2015 to 5.1 Singapore cents.
  4. Cash flow from operations came in at S$32.7 million and capital expenditure stood at S$11.2 million. This gave QAF positive free cash flow of S$21.5 million, a sharp improvement from the free cash flow of $11.4 million recorded during the same period a year ago (S$23.6 million in cash flow from operations and S$12.2 million in capex).
  5. As of 30 June 2016, QAF had S$97 million in cash and equivalents and borrowings of S$85.6 million, resulting in a net cash position of S$11.4 million. QAF’s balance sheet has weakened compared to a year ago when it had S$82.9 million in cash and equivalents and total debt of S$65.1 million.
  6. Lastly, QAF declared an interim dividend of 1 cent per share, unchanged from the previous year.

In summary, QAF saw its top-line fall, but still recorded strong profit growth anyway. The company also turned in higher free cash flow. The snag here is that its balance sheet had weakened, despite still being in a net cash position.

Operational highlights

QAF’s revenue had fallen mainly because it had deconsolidated the results of one of its subsidiaries, Gardenia Bakeries (KL) Sdn Bhd. The deconsolidation happened because QAF sold 20% of its stake in the subsidiary in April 2016; the sale also resulted in QAF recording the aforementioned one-off gain. QAF currently owns 50% of Gardenia Bakeries.

I also mentioned earlier that QAF mentioned to show strong profit growth even if the one-off gain had been netted out. That’s a hat-tip to increased profitability at Rivalea, QAF’s fully integrated meat producer in Australia. Rivalea had enjoyed increased meat processing activities, lower operating costs, and higher average selling prices from a better product mix.

QAF’s Trading & Logistics business segment also saw better profitability “due to higher sales as well as a larger proportion of sales of higher margin products in its total sales mix.”

The road ahead

QAF had provided the following commentary in its earnings release for its outlook ahead:

“As announced by the Group on 26 April 2016, in compliance with FRS [financial reporting standards], the Group is required to determine the fair value of the Group’s remaining 50% stake in GKBL [Gardenia Bakeries]. The Group has engaged external valuers to support the determination of the fair value and an announcement will be made when the fair valuation is completed.

In the event where the fair value is higher than the carrying value of the 50% stake in GBKL, the Group will recognise the excess as a gain in the income statement. Subsequently, the resultant carrying value of the joint venture will be subjected to a yearly impairment review.

Save for the effects as described above, the Group is expected to perform satisfactorily for 3Q 2016, barring any unforeseen circumstances.”

QAF’s shares closed at S$1.12 last Friday. This gives the firm a trailing PE ratio of 9.1. It should be noted that the trailing earnings contains the one-off gain mentioned earlier.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Esjay does not own shares in any companies mentioned.