Monday, 19 October 2015

QAF Limited

OCBC on 18 Sep 2015

QAF Limited (QAF) is primarily engaged in bakery manufacturing and distribution with leading brands Gardenia and Bonjour, while it also owns the largest fully integrated pork production business in Australia under Rivalea. The group holds dominant positions in the broader baked goods segment (i.e. bread, cakes, pastries) in its core markets, Singapore, Malaysia and Philippines. In addition, Rivalea produces an estimated 17-20% of total pork produced in Australia. Their strengths lie in strong branding, new value-added products, extensive distribution reach as well as continued productivity initiatives. Given the recent improvement in estimated core profitability, and on further expansion plans and favourable outlook for its industries, we think this inexpensive stock deserves more attention. We also expect the group to at least maintain its dividend pay-out of S$0.05/share, offering a dividend yield of ~5%. Using sum-of-the-parts methodology, we initiate coverage with a BUY rating and TP of S$1.27.

Established market leader in baked goods and pork production 
QAF Limited (QAF) is primarily engaged in bakery manufacturing and distribution with leading brands Gardenia and Bonjour, while it also owns the largest fully integrated pork production business in Australia under Rivalea. The group’s bakery brands command 60% of market share under the packaged loaf bread segment in Singapore. Within a broader baked goods segment (i.e. bread, cakes, pastries), they are leaders in their core markets with market share of 26%, 18%, and 11% in Singapore, Malaysia and Philippines respectively.

Profitability expected to continue improving
We note that both of the group’s core businesses hold competitive strengths such as branding power, value-added product portfolio, as well as extensive distribution networks in its core markets. The group leverages on its knowledge and research capabilities to launch new products as well as productivity initiatives to garner better margins. We estimate that core PATMI on a group level has been relatively steadier since FY11, vs. a seemingly bumpy net profit performance. Both core business segments are recording gradual signs of recovery in terms of EBIT and they continue to improve as of 1H15. Expansion of facilities coupled with extension of its distribution reach in other markets would help to drive growth ahead. Favourable industry trends for both operations coupled with expectations for lower global wheat prices this year bode well for the group. 

Initiate with BUY; S$1.27 TP
QAF is currently trading at 10.6x FY15/16F, below its peers’ averages for both consumer goods (22x-26x) as well as integrated food producers (12x-18x). In addition to the above, the stock has been offering a stable dividend payout of S$0.05/share since FY11, which gives a dividend yield of ~5%. We think this inexpensive stock deserves more attention. Using sum-of-the-parts methodology, we have derived a TP of S$1.27, implying a total return potential of 33%. Initiate coverage with BUY.

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