• Mixed sales results across segments
• Cost pressures to continue
• Potential listing of Primary Production

Weaker 2Q17

QAF reported a weaker set of results for 2Q17. Revenue was up 1% to S$209.8m while PATMI fell 72% to S$8.06m vs. S$28.8m in 2Q16, albeit 2Q16 included an exceptional gain of S$9.7m. There was a slightly mixed sales performance across segments (Bakery +5%, Primary Production -2%, Trading and Logistics ~0%). However, EBIT fell across all segments (Bakery - 29%, Primary Production -38%, Trading and Logistics -25%), due to higher distribution and A&P expenses for Bakery while Primary Production saw lower prices and hence weaker profit margins.

1H17 overall revenue was down 8% to S$422.6m due to the deconsolidation of results of GBKL, and excluding the one-off gain last year, PATMI was down 37% to S$22.3m.

Cost Pressures From Several Fronts

Recall that management had guided for potential cost pressures this year, particularly for the Primary Production segment. The group expects performance to be affected by several factors including competition, currency volatility and higher costs from raw material prices, energy and distribution costs as well as other operating costs. The Bakery business has been facing heightened competition and higher raw material prices.

The new plant in Johor will replace the old plant that had production issues, with operations to commence in 3Q17. On Primary Production, Rivalea saw lower average selling prices despite higher volume, due to a general oversupply situation that left significant pressure on prices and margins. The group has seen some signs of price stability now.

Proposed Listing of Primary Production Segment

All considered, the near term outlook looks challenging. Nonetheless, the group is also making meaningful expansion plans and strategic initiatives. Following an earlier announcement of a strategic review, the group has decided to pursue a listing of the Primary Production business on the Australian Securities Exchange, which is intended to increase shareholder value as well as enhance Rivalea’s business profile in its core market. Rivalea will not cease to be a subsidiary. There is no assurance that the proposed listing will materialize. That said, due to a redistribution of internal resources, we are CEASING COVERAGE.

Source: OCBC Research - 10 Aug 2017