• 3Q16 core PATMI rose 56% YoY
• Better profits from all segments
• Favourable outlook for raw material prices

Positive underlying results continue

In the latest quarter of results, QAF continued to record positive underlying earnings growth with PATMI up 84% to S$19.4m. Aside from the deconsolidation of results from GBKL since Apr- 16, underlying sales had increased for all segments, while both Bakery and Rivalea (Primary Production) also continued to enjoy lower raw material costs.

Favourable outlook for raw material prices

At this juncture, wheat and coarse grains prices may continue to look favourable for the group due to ample global supplies. The projection by ABARES for wheat crop in Australia is set to reach about 28.1mmt, albeit some recent concerns due to frost damage. We would look out for any revised projections when the harvest season starts in Dec for Australia. The International Grain Council (IGC) had also raised its global grains (wheat and coarse grains) production to 2,084mmt, 4% higher vs. last year.

Still the leading player in baked goods

According to Euromonitor International, while artisanal choices and alternative snack options have been increasing, QAF’s Gardenia remains the leading company in the baked goods segment for key markets, Singapore, Malaysia and Philippines. In retail value terms, for the overall segment (which includes artisanal), the group holds an estimated 24% share in Singapore, vs. Auric Pacific’s 12.5%; 20% in Malaysia vs. 12% for Italian Baker Sdn Bhd; 13% in Philippines vs. 10% for Goldilocks Bake Shop. Notably, market share was expected toincrease in Malaysia due to the discontinuation of the High 5 brand. Overall outlook for the Bakery division also remains decent, as the overall baked goods market is expected to increase in retail value at a range of 2-4% CAGR for the three markets. Staying positive

The stock has done well thus far, giving a YTD return of 26% vs. STI’s -0.3%. With 3Q16 earnings above expectations, and as conditions continue to look supportive for the group, we have adjusted our estimates and rolling forward, our SOTP-based fair value estimate is raised to S$1.46 (previous: S$1.33). Maintain BUY.

Source: OCBC Research - 29 Nov 2016