• Underlying sales grew for all segments
• Notable EBIT for Primary Production
• Cool off for now

Core businesses grew in FY16

QAF Limited’s FY16 revenue was down 11% to S$889.5m, while PATMI was up 129% to S$120.4m, due to a one-off gain amounting to S$59.4m arising from the sale of 20% stake in Gardenia Bakeries KL Sdn Bhd (GBKL) earlier in Apr 2016 and a re-measurement of the stake in GBKL. Excluding this gain, PATMI was up 16%. Notwithstanding a one-off ~S$8.6m impairment loss on PPE, core results would have been higher and within our expectations. The decrease in revenue was due to the deconsolidation of GBKL, otherwise, sales had increased across all business segments (Bakery +11%, Primary Production +6%, Trading & Logistics +1%), driven by new products, better ASP and volume.

Primary Production op profit at a high

Notably, Rivalea’s (Primary Production) EBIT rose 151% to S$42.1m on the back of favourable product mix, productivity gains and lower operating costs especially feed costs. For Bakery, excluding GBKL, EBIT was 20% lower due to continued losses from its China operations, while excluding GBKL and impairment charge relating to China, EBIT would have been up 2% to S$30.1m.

But some potential cost pressure ahead

In 2016, both Bakery and Primary Production enjoyed lower raw material costs, particularly flour for the former and feed costs for the latter, while any run-up may eventually translate to higher operating costs. The company also guided that Rivalea may see lower ASP and pressure on margins amid higher market supply, competition, stricter requirements on products as well as expansion-related costs, while profits may be subject to income tax going forward.

Still positive for longer term

After a good run-up in share price and a lack of near term catalysts, we downgrade the stock from buy to HOLD with unchanged FV estimate of S$1.46 at this juncture. Nonetheless, we remain positive on the company for the longer term, given the formation of an executive committee, meaningful expansion plans and potential strategic initiatives. The group has said it is exploring strategic acquisitions and/or collaboration with other food companies, while also conducting strategic reviews of its primary production business in Australia and its bakery business in China. Thus longer term investors can consider accumulating below S$1.36.

Source: OCBC Research - 2 Mar 2017