QAF Limited (Keeping an eye on it)

In my previous post, I mentioned that I may be buying some stocks given the potential volatility caused by Brexit.

Well, I did buy some Riverstone stocks prior to the confirmation of Brexit (you know, buy on the rumor), while expecting then that Brexit will not happen. Well, Brexit did happen- surprise, and surprisingly the stock price of the Riverstone went higher after the announcement. After all, there is no rational for short-term stock price volatility.

Ok, till today, I have not bought any more stocks. I initially intended to buy some decent dividend paying stocks like QAF, ST Engineering, Vicom or Heineken Malaysia Berhad. Ok, not those super high yield kind — but more of those which I can understand its fundamental and business, low debt etc…

 

However, being the ‘cheapskate’ that I am, I still hope that price drops further before loading up on some (Brexit didn’t have the effect as some may have expected).

Nevertheless, I recently bought some Vicom shares (its share price has been hovering near its 52 week low).

• QAF Limited (Dividend Yield 4.5%)
• ST Engineering (Dividend Yield 3.14%)
• Vicom Limited (Dividend Yield 3.14%)
• Heineken Malaysia Berhad (Dividend Yield 4.4%)

When it comes to selecting dividend paying stocks I tend to like the views shared by Keith Park, who writes about dividend investing on DivHut (read here).

To quote from Keith:“To me, this list entails the ‘best of the best’ in terms of finding excellent long-term dividend growth stocks. To make the elite Dividend Aristocrats list, a stock must raise its dividend every year for at least twenty-five years……Typically, I like this ratio to be well below 80% as it would indicate a sustainable dividend yield with room for future growth based on current earnings. …..For regular dividend paying stocks, I like to see yields well below 5%. Anything higher raises flags.”

 

Ok, I have written about ST Engineering, Vicom & Heineken Malaysia Berhad. But not QAF Limited. Let’s take a look at QAF Limited in this post.

QAF Limited

About QAF’s business

The business of QAF Limited is pretty straight-forward (and tend towards boring).

The company manufactures and distributes bread, bakery, and confectionery products. They offer packaged loaf bread, pastries, and bakery products. It is also involved in the provision of warehousing logistics for food items; trading and distribution of food and beverages; production, processing, and marketing of meat; and feed-milling and sale of animal feeds and related ingredients. In addition, the company engages in the manufacture of Kaya and related products; production and wholesale of pig meat; investment leasing; operation of supermarkets; production of milk and dairy products; share trading and investment activities; and operation of cold storage warehouses, as well as operates as a purchasing agent for bread, confectionery, and bakery products. It has operations primarily in Singapore, Malaysia, the Philippines, and Australia.

Some of the more prominent brands that the company has in its portfolio include Gardenia, Cowhead, and Farmland.

The beauty of the stock being ‘boring’ is that I pretty much understand the business of the company (Bakery Segment and Primary Production) and I don’t foresee much disruption to its business in the future.

A couple of financial bloggers have also shared their thoughts on this company.

QAF LIMITED- INITIATION REPORT by Heartland Boy (read here)

QAF Limited: $1.14 a share is cheaper than 93c a share? by QAF Limited: $1.14 a share is cheaper than 93c a share? (read here)

 

Financial fundamentals

Incidentally, I have not studied the financial fundamentals of QAF Limited. Let’s take a look.

The good points:

1. Valuation wise, it appears that QAF Limited is under-valued. A search in POEMS, shows that the P/E is only 11.79– definitely not its highest. Nevertheless, it is  67% of the peak P/E which is much higher than Graham’s preference for 40% or less. (QAF’s peak P/E ratio over these last five years is 17.7).
2. The EV/EBITDA (as shown above) is 5.61 (As a rule of thumb, any EV/EBITDA below 10 is the sign of a good value).
3. The price to book value is also relatively low at 1.37.
4. The balance sheet is ok, with a higher total cash level of SGD 88.71M (which is more than the debt level of SGD86.84M).
5. Current Ratio is 1.98 (Acceptable current ratios vary from industry to industry and are generally between 1.5 and 3 for healthy businesses).
6. Dividend Yield(%) is respectable at 4.5%. (Which is definitely better than the yield from the Singapore government 10-year bond – which has a yield of around 2.0% right now, according to the Monetary Authority of Singapore. Currently, there are a few credit rating agencies that have given Singapore a triple-A rating).

The bad points:

1. Profitability is low. Profit margin and Operating Margin are only at 5.63% and 7.42%.
2. The return on assets and return on equity is low at 6.61% and 12.69%.Not a growth stock (eg. min 20%  for ROE).
3. A search in POEMS shows that the 5 years EPS growth rate is -1.12%.
4. Its debt / equity ratio is 18.61 (>1) – not good.

The general take I have from this is that valuation wise, the company is alright. It has a conservative balance sheet and the dividend yield is good. However, its growth is lacking… more of a mature slow growing company.

Historical financial data

Ok, so that is the current financial statistics of this company. However, has it always been like this? For instance, was the balance sheet and dividend yield always so good? Let’s check it out.

See below charts (data from Morningstar).

The charts of QAF is not that straightforward (eg. not a simple consistent up or downtrend).

• Earnings per share have generally been trending up since 2013. The 2008-09 Great Financial Crisis seems to have a big negative impact to its EPS. So its earnings aren’t really recession proof.
• The dividend has been consistent. Not exactly up-trending in recent years. However, with a consistent dividend payout and decreasing payout ratio, it is generally good. The dividend payout ratio has been hovering around low 50% which is great as it would indicate a sustainable dividend yield with room for future growth based on current earnings.
• Free cash flow is erratic. Appears to be trending down in recent years. Not good.
• ROE, ROA and most importantly ROIC has been trending up in recent years – which is good.
• Financial leverage has been decreasing steadily which is also good.

All in all, in recent years (eg. 2013 onwards), the financials of QAF has been getting better, except for free cash flow. Not extremely fast growth, but incrementally (boringly) good.

 

 

I don’t think I can do a PEG or intrinsic value calculation for QAF given its negative (-1.12) 5 years EPS growth rate.

So I shall just stop here.

 

In gist, I think the financial fundamentals of QAF has been getting better in recent years. It has a good dividend yield and its business model is simple.

It is one of the stock I am keeping an eye on, and it would be great if the good performance continues so that the long-term EPS growth rate becomes positive.