What Investors May Have Missed About The Strengths Of QAF Limited’s Business

QAF Limited (SGX: Q01) is a diversified food production company that produces bread, among other kinds of food products.

When I first came across the company, my initial impression was that it’s a boring business, selling some boring products. (What can be more exciting than white bread?)

Yet, the company’s strong stock market performance over the last five years – its stock price has increased by 84% – caught my attention and made me decide to dig in further to gain a better understanding of its business. Who knows, maybe the company could be a hidden technology company?

Turns out, my initial impression of QAF was right. It is indeed in boring businesses such as the production of bread, pork, packaged food products, and more.

But beneath the boring faced, QAF exhibited a number of strengths that investors may have missed.

The hidden strengths

As a start, QAF has a respectable return on equity (ROE). In 2016, the company generated a ROE of around 13% (after adjusting for one-off gains), while carrying more cash than debt on its balance sheet.

It may not be an apples-to-apples comparison, but food & beverage retailer BreadTalk Group Limited (SGX: 5DA) and beverage manufacturer Yeo Hiap Seng Ltd (SGX: Y03) both had ROEs of less than 10% in the same period.

One reason why I think QAF managed to generate that high ROE is because of its leading market positions. This is another of the company’s strengths.

QAF has three business segments, namely, Bakery, Primary Production, and Trading & Logistics.

In its Bakery business, QAF has leading market shares in Singapore (the company’s Gardenia brand was ranked the ‘No.1 Selling Bread Brand’ by A.C. Nielson in terms of sales and volume for the year ended June 2016), Malaysia (Gardenia was voted as Malaysian consumers’ ‘Most Preferred Brand’ in the 2016 Putra Brand Awards), and Philippines (Gardenia has a share exceeding 60% in Metro Manila’s packaged fresh bread market).

In QAF’s Primary Production business, its subsidiary, Rivalea, is a leading integrated pork production company in Australia with a market share of approximately 17%.

Given that the Bakery and Primary Production segments accounted for 87.6% of QAF’s 2016 revenue, understanding the market positions the two segments have can explain the reasonably strong ROE of the company.

A Foolish conclusion

QAF operates in businesses that are usually categorized as boring and slow growing.

Yet, the company has leading positions in various markets. That is a strength that allows it to generate a reasonably attractive return on equity.

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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 Lawrence Nga doesn’t own shares in any companies mentioned.