QAF Limited’s Latest Earnings: The Good News And The Bad News Investors Should Know

At the core, QAF Limited (SGX:Q01) is a food production company.

The company is involved in a number of different businesses, ranging from bakery operations to pork production, food processing and distribution to feed milling, and food trading, distribution, and manufacturing to wine distribution. On top of these, QAF also owns warehouses which it leases out.

Some of the familiar consumer food brands that the company has in its portfolio are Gardenia, Cowhead and Farmland.

Last week, QAF reported its 2017 third-quarter results. In this article, I will look at the positive and negative points from the earnings release.

Starting with the positives

For context, QAF organizes its business into three business segments: Bakery; Primary production; and Trading and Logistics. For the third quarter, QAF’s revenue was S$211.6 million, down 0.4% from the S$212.4 million recorded a year ago.

Despite the slight decline, there were still some brights spots.

Firstly, revenue grew for its Bakery segment and Trading and Logistics segment. QAF’s management team credited the growth to its performance in Philippines, where the company launched a number of new products, and also a stronger market penetration in Australia through its Bakers Maison operations there.

There was also positive signs on QAF’s balance sheet. The company was able to reduce its inventories by a larger percentage compared to its revenue decline. Inventories were down 4.9% year-on-year to around S$53 million.

Moreover, the company maintained a strong balance sheet with S$130.8 million in cash and equivalents, and borrowings of S$105.0 million. As such, QAF was in a net cash position of S$25.8 million at the end of the reporting quarter.

… and now, the negatives

Although revenue declined only slightly, QAF’s profit fell 62% year-on-year to S$7.45 million for the reporting quarter. QAF’s total costs increased 6% year-on year to S$203.9 million, despite the flattish revenue. Costs increased across the board in the quarter, with the highest increase coming from advertising and promotion expenses.

QAF said that its Bakery profit declined from higher operating costs arising from start-up costs for a new plant in Johor, and higher advertising costs in the Philippines, in response to heightened competition. To add to the pain, the Primary Production segment also reported weaker profitability for the quarter due to overall market oversupply of pork which led to lower selling prices.

Unfortunately, the situation is not expected to improve in the near term. QAF expects its future performance to be impacted by competition, currency volatility, and higher costs from raw materials, energy, advertising and promotion, and distribution in certain markets.

A Final conclusion

Overall, it was a challenging quarter for QAF with flattish revenue and lower profitability.

Looking forward, the company expects to continue facing the twin challenges of higher competition and higher operating costs. As such, it is important for the investors keep an eye on how well the company manages its operating costs to counter the challenges.

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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.