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Every three years or so, the market corrects and offers us low prices on a range of securities. Recently, the share price of QAF has fallen by more than half from about $1.50 to about $0.63. Although the downward price movement occurred during a period of generally poor market sentiment, it is also a reflection of several problems which the company is presently facing. Yet, does QAF still have good businesses? If so, could the lower prices of QAF be an opportunity for investors to make a value investment?
1. Bakeries
The most attractive business of QAF are its bakeries. Its key markets are Singapore, Malaysia, and Philippines for Gardenia; and Australia for Bakers Maison, which sells partially baked pastries to F&B operators. Gardenia has been selling loaves since 1978, and Bakers Maison since 1998. In the past 10 years, the entire bakery division contributed about 80% of QAF’s earnings. During the same period, it never lost money in any year, earned a high profit-before-tax margin that averages 11.8%, and had a high average return (ROA) of 19%. The majority of these margins and returns are assumed to be contributed from Gardenia, since it has a larger market compared to Bakers Maison, and QAF has not revealed any numbers for Bakers Maison.
1.1 So Good, Your Competitors are Not Letting You Eat it On Your Own
Bread loaves are simple to produce, and there are many bakeries – ranging from the neighbourhood family-owned stores to larger chains such as BreadTalk and Four Leaves – producing and selling their own loaves, within the store premises or (partially) baked in a central kitchen. The difference between these retail bakeries and Gardenia is that Gardenia produces its loaves in bigger quantities, using fully automated processes, from mixing to packaging. The trade-off on lower production cost – which is where the smaller bakeries exploit – is its lack of variety and freshness.
Even though Gardenia competes with retail bakeries, it still has its market of more price-sensitive consumers. A $2 sandwich loaf can provide for a person’s breakfast over 4-6 days, while the same amount can only buy 1.5 bun from a retail bakery. Bakeries of different scale and product varieties compete in largely separate markets. The bigger worry for Gardenia, are not the retail bakeries, but the other low-cost sandwich loaf bakers.
In Singapore, Gardenia claims that it continues to be the top selling brand by sales value and volume. Outside of Singapore, not all has been going well for Gardenia’s business.
a) Spectre of affirmative action
In 1986, QAF entered the Malaysian bread market and has since expanded to 5 factories. Publicly available information shows QAF’s Malaysian subsidiary – Gardenia Bakeries (KL) Sdn Bhd (or GBKL) – to be a reliable and satisfactory performer.
Gardenia Bakeries (KL) Sdn Bhd
(in $m) Revenue PAT NPM (%) Assets ROA (%)
FY17 285.1 15.1 5.3 119.5 12.6
FY16 (9m) 207.0 12.7 6.1 119.4 10.6
FY15 279.3 12.3 4.4 104.5 11.7
FY14 297.9 10.7 3.6 109.5 9.7
FY13 291.7 3.7 1.2 103.0 3.6
FY12 281.3 10.4 3.7 103.0 10.0
But due to Malaysia’s New Economic Policy of 1971 – which required QAF to sell 70% of its shares in GBKL to local Malay persons or owned entities, over a period of time – QAF sold 30% of GBKL for RM55m (or $25m, at then exchange rate) in 2001 to Padiberas Nasional, a rice processor and distributor. In 2016, another 20% was sold to Padiberas Nasional for RM90m (or $30m). QAF negotiated with Malaysia's Ministry of International Trade and Industry – the agency which enforces the foreign ownership rules – to allow QAF to retain a 50% stake of its Malaysian business. But this may have come at a high price.
QAF charges licensing fees to GBKL for the production of Gardenia bread. Prior to the 2016 deal with Padiberas Nasional, the licensing fees stood at 5.25% of GBKL’s revenue. Compared to the average manufacturing license fees, this is considered high. And may have been QAF’s strategy to ensure it earns a 5.25% margin on GBKL’s sales, in the event it is forced to dispose their controlling stake, as they must have anticipated. But this ultimately failed to retain QAF’s ability extract earnings from GBKL, if it were indeed intended as such. As part of the 2016 deal with Padiberas Nasional, the licensing fees were re-negotiated down to only 1.5%. The financial impact of this on QAF is significant. Based on GBKL’s revenue of $285.1m in 2017, the loss of licensing fees amount to $10.6m for QAF; far more damaging than the loss of a 20% stake on $15.1m of profit for the same year. The combined financial impact of the 20% stake sale and reduced licensing fees resulted in far lower earnings for the entire bakery segment; $3m from 20% of GBKL’s profits and $10.6m from lost licensing fees.
Bakery Segment Results
(in $m) Revenue EBIT EBITM (%) Assets ROA (%)
FY17 337.0 23.1 6.8 387.3 5.9
FY16 375.5 32.2 8.6 364.6 8.8
FY15 511.5 60.1 11.7 329.2 18.2
FY14 506.4 54.0 10.6 307.7 17.5
FY13 493.8 51.6 10.4 280.9 18.3
FY12 473.6 51.3 10.8 292.7 17.5
The lost licensing fees may be partially compensated by a consequent rise in GBKL’s profit, which QAF owns 50%, provided that GBKL’s lower licensing fees translate into higher margins. Comparison of FY16 and FY17 figures has not shown this to be the case. Perhaps GBKL’s FY17 results would have been worse without the lower licensing fees, or perhaps the ‘savings’ have been spent elsewhere. In addition, as part of the stake sale agreement with Padiberas, QAF had to purchase a 10 acre land – located next to GBKL’s existing factory in Bukit Kemuning Selangor – from Padiberas, which it paid $10.3m for. To summarise the deal, QAF sold a high return asset for $30m, bought a low return one for $10m, and lost $10m of recurring income. A common critique of the NEP and its affirmative action policies is that the beneficiaries were rarely the average person, but mostly elites and allies associated with BN. QAF should make new friends with the other local godfathers.
b) No home advantage
Perhaps it was in anticipation of this loss of income that, in late 2014, QAF’s 55%-owned subsidiary Gaoyuan Group started a Gardenia factory in Fujian, China. It operated 3 production lines and distributed to 9 cities in the vicinity. But the venture was unsuccessful. In spite of its vast production and marketing experience, the business incurred losses totalling $24.5m over the next three years. The factory ceased operations in December 2017.
Gaoyuan Group
(in $m) Revenue PAT
FY17 6.4 -6.1
FY16 5.8 -13.2
FY15 3.6 -5.2
The other 45% of Gaoyuan Group is owned by Andree’s son, Lin Kejian (or Daniel Halim). Why did the venture have such an ownership structure? Was the Board not completely supportive of the venture? Was Daniel this his rite of passage?
c) Brothers fight all the time
The remaining ASEAN countries where QAF had no footprint are: Indonesia, Cambodia, Vietnam, Laos, and Myanmar. Except for Indonesia, there are few foreign companies selling consumer goods in these countries, and it is rare to even find modern convenience stores. It may yet take some time before foreign companies like Gardenia are welcome.
In Indonesia, Nippon Indosari is one of the players in the packaged bread market with its Sari Roti brand. Sari Roti is distributed through Indomaret, a convenience store chain controlled by Anthony Salim. Indoritel Makmur (Indomaret) also has a 25% stake in Nippon Indosari. Will Andree and son enter the Indonesian market to compete with his brother? Given Andree’s less aggressive personality, his son Daniel’s lack of a strong track record, it seems unlikely. But for Anthony, it is quite the opposite.
Nippon Indosari is expanding into QAF’s turf in Philippines. In February 2016, it announced a joint venture with Monde Nissin, one of the largest food manufacturer in Philippines. Their plant was completed this year, and their bread can now be found in convenience stores in Metro Manila. Through First Pacific, Anthony also controls PLDT – Philippines’ largest telco – so he is no stranger to doing business in Philippines. Back in Indonesia, Indomaret also distributes a brand called Prime Bread, whose packaging and logo looks suspiciously similar to Gardenia’s. It might have been too much to expect Andree to have the support of godfathers in Malaysia, when he doesn’t even have the support of his own brother.
d) Hastening expansion across Philippines
As QAF has no more room to expand in Singapore, lost income in Malaysia, failed in both Thailand and China, its best remaining bet for near-term growth lies in Philippines. In 1998, QAF built a Gardenia factory in Cebu, located roughly in the middle of Philippines’ sprawling islands. A decade later, it added another plant in Laguna, located in northern Philippines. Throughout the years, production lines were gradually added as sales increased, but QAF hastened the expansion when it must have been clear that they were about to lose a significant portion of their Malaysia-sourced income, and that dear brother is building a plant in his key market. In November 2015 – about a year before QAF’s deal with Padiberas Nasional – QAF constructed another plant in Laguna. In 2016, it announced the construction of two new plants; one in Mindanao, located in southern Philippines, and another in Luzon, located in northern Philippines.
Although QAF’s Philippines revenue are growing steadily, there are no publicly available income figures.
Philippines FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17
Revenue ($m) 87 102 108 114 120 140 160 173
1.2 Are there only crumbs left?
Loss of income in Malaysia, failure to expand into new markets, and impending competition in Philippines. Gardenia’s prospects certainly isn’t looking great. But it still has three redeeming qualities worth considering.
a) Goodwill
An ideal environment for a business is one where it has none or few competitors. Having competition – whether it is from Sunshine and/or retail bakeries in Singapore, Massimo in Malaysia, and Sari Roti in Philippines – is par for the course. Gardenia’s ability to manage competition, and the strength of the goodwill they have been building, was put to the test in Malaysia from 2012 to 2013.
In early 2012, a boycott of Gardenia’s products were started by several netizens and its message ‘went viral.’ The boycott, mainly written in Mandarin, claimed that GBKL discriminated against Malayan Flour Mills – which is controlled by Robert Kuok – by not buying flour from them. It further argued that buying Gardenia bread is a show of support for UMNO, as Padiberas Nasional is controlled by Syed Mohktar, a godfather who has received plenty of business and support from the government. Perhaps coincidentally, the boycott surfaced just months after Massimo entered the market in late 2011. To capture market share, Massimo priced its bread loaf at RM2.50 – compared to Gardenia which was selling at RM3.50 – for the next two years. GBKL’s earnings took a hit in FY13, but as Massimo stopped selling bread at a large discount, GBKL’s earning recovered and continued to grow.
Another competitor – High-5, who has been around since 1960 – did not survive. Just months after Massimo’s entry, financial malfeasance was uncovered by its auditor Baker Tilly Monteiro Heng to the tune of RM297m. The financial hole eventually led to cuts in production and distribution. Its effort to return to profitability with a new manager and some equity injection also failed. It was delisted in 2014, and finally closed shop in June 2016. The timing of Massimo’s entry into the market could not have been better.
b) Growth potential of developing economies
Although substantial licensing fees were lost in Malaysia, QAF still has a 50% stake in GBKL. Part of the deal with Padiberas Nasional includes the listing of GBKL, or complete acquisition of either party’s stake, by 2026. As consumer spending gradually increase in Malaysia, GBKL stands to improve its earnings if it is able to maintain, if not increase, its share of the market. When the time comes for QAF to either dispose or acquire the remaining stakes of GBKL, QAF will stand to benefit from GBKL’s higher earnings. Of course, this is provided that the terms – whether on disposal or acquisition – are not prejudicial to QAF.
In Philippines, Gardenia has been around for 20 years. So it should have built up sufficient goodwill and operating experience to take on competition. Although Gardenia’s share of the market may now be limited, the growing Philippines economy will enlarge the pie for both players. Philippines’ population is three times the size of Malaysia’s, while its GDP per capita is only a third of Malaysia’s. So there’s plenty of room for consumer spending, and Gardenia, to grow.
c) Strong financial position
Although Andree is less aggressive as a businessman, his financial conservatism makes QAF a steady ship. For Gardenia, that means a firm footing in fending off competition. Over the past decade, QAF has been gradually reducing its borrowings to a conservative level, while consistently maintaining a healthy level of free cash flow.
QAF Loan to Asset (%) FCF ($m)
FY17 13.7 24.9
FY16 11.1 35.6
FY15 12.7 27.0
FY14 20.9 49.0
FY13 13.3 40.1
FY12 16.8 6.3
FY11 15.5 28.5
FY10 16.5 45.4
FY09 21.3 51.4
FY08 29.4 64.0
2. Pig Farming & Pork Processing
The second – and less attractive – business of QAF is its pork business, Rivalea. In the production of pork, Rivalea mills the grains which are fed to the pigs, rear the pigs by providing feed, vaccine, and shelter, and then slaughter the pigs after they have grown adequately. The processed pork – bacon, ham, belly, shoulder, loin, etc – is then sold to restaurants, hotels, caterers, supermarkets, and other food establishments in Australia and Asia. Presently, Rivalea produces about 17%, and processes about 24%, of the pork sold in Australia. This does not seem to have changed much since QAF’s acquisition of Rivalea (then Bunge Meats) in 2002.
2.1 The pock marks
Compared to the bread business, Rivalea is far less profitable. In the past 10 years, Rivalea contributed about 8% of QAF’s earnings. During the same period, it lost money in 2009, earns a low profit-before-tax margin that averages 3.1%, and a return (ROA) that averages 4.7%. There are four reasons for this, and the inverse may explain the comparatively better performance of the bread business.
a) Labour and land intensive
The low technology requirement means there are numerous competitors in the pork production industry, just as it is in bread production. But unlike bread production – where QAF can overcome its competitors with larger facilities and automation – the numerous tasks required in ensuring healthy growth of a pig places a limit to lowering production costs that can be achieved through automation and larger facilities. For example, although there are now automated feeding and cleaning systems in pig farms, humans are still required to inspect the health of the pigs, provide vaccines, provide treatment to those infected with diseases, and to remove the carcass of those that have died. A farm with a larger herd will therefore require proportionately more labour. In the processing of pork, although modern facilities have automated lines to wash and move the carcasses, the task of removing the entrails and unwanted parts, and butchering the carcass into smaller marketable parts, are still performed by humans.
In addition, a larger herd will also require proportionately more sheds to house the pigs, which means more land is required, translating into higher land ownership/rental costs. QAF’s feed milling, pig farming, and pork processing operates over 7,600 hectares, or 76 square kilometres of land; equivalent to 10 times the size of Bishan.
b) Sensitive to feed cost
Feed is the largest cost component in rearing pigs. Pig feed is mainly composed of corn, soybean and wheat. Any event leading to a rise in the price of these crops will increase the cost of QAF’s pork business. Such event may include extreme weather change leading to a poor harvest – in Australia and/or other regions which grow these crops – or an increase in demand for these crops from other countries and/or users. The unstable earnings of QAF’s pork business over the past 10 years is a good illustration of its vulnerability to not only periods of pork oversupply, but also periods of higher feed cost. While the current recession in pork prices is unlikely to have any lasting damage to QAF’s pork business, there will be the occasional drought leading to a poor grain harvest, resulting in higher feed cost.
c) Little product differentiation
If Rivalea had been able to price its products with a fat margin, concerns of land, labour, and feed costs could easily be mitigated. But customers of Rivalea’s pork products are indifferent of who reared the pigs, or processed the pork, so long as the pork are of acceptable quality and price. This means that the food and beverage operators who buy Rivalea’s pork – such as restaurants and supermarkets – will consider buying from other suppliers if there are others selling pork of the same quality, but at a lower price. In addition, the rearing of pigs is simple and can be done by just about anyone with some effort and equipment, allowing many entrants into the industry. QAF’s management is aware of the problem, and has since 2010 stated their intention to increase its margins on pork products by selling more fresh pork, and by increasing the brand value of their pork products. So far, there is little evidence of success.
d) Occasional market imbalance
The high pork prices from 2015 to 2016 led pig farmers to increase pig production to an extent where market demand for pork since 2017 could not keep up with its supply. As the selling price of pigs has fallen to levels which are lower than how much it cost to rear them, there has been reports of pig farmers culling (killing) their piglets, so that they no longer have to ‘waste money’ feeding them.
The present oversupply situation is worsened because there are few overseas buyers for Australian pork. As a developed country, the cost of production of pork in Australia is higher than other countries in the region such as Vietnam and Thailand. And since Australia is located far from the main pork markets of United States, Europe, and Japan, the added cost of shipping Australian pork to these markets makes Australian pork expensive compared to their local producers. Furthermore, although China is the world’s largest pork consumer, there are no existing trade agreements which allow Australian pork to be sold in China. Andrew Spencer, CEO of Australian Pork Limited, expects such a trade agreement to be in place no earlier than 2020. Even if China opens its pork market, Australia’s higher cost of production makes it uncompetitive to producers from other countries. Presently, only a very small percentage of Australian pork is exported.
2.2 Is it as ugly as it looks?
The inefficiencies of operations, difficulties in product differentiation, and occasional market imbalances gives the pork business poor returns. This may have been the reason that prompted QAF’s management to propose selling 49% of the shares of Rivalea through an IPO on ASX, in late 2017. But only two months later, management announced its decision to halt the share sale; the likely reason being insufficient market interest in pork businesses. After all, the period when it proposed the share sale coincided with the pork oversupply in Australia. Yet, this was not the only time QAF tried to offload its pork business; it previously announced its intention to list the business in late 2010.
It is unknown when pork prices will recover. But since fresh pork imports are not allowed in Australia – only a small quantity of processed pork is imported – local producers like Rivalea is shielded from even lower-priced overseas competitors. And since pork consumption in Australia is stable and increasing, the pork oversupply situation will eventually resolve as producers continue to decrease production when it is unprofitable, or exit the industry. Due to the low returns of most agriculture and animal husbandry business, leverage is commonly used to juice up returns. QAF appears to have been conservative in this aspect, which increases the probability of Rivalea’s ability to remain a going concern regardless of the industry condition. So QAF should have no problem waiting for the industry to recover. And when it does, QAF may finally unlock (some) value of Rivalea, if it doesn’t change its mind.
3. Valuation
Having looked under the hood and kicked the tyres, the final step involve deciding how much it is worth. Performing valuations are difficult and tricky because it involves making assumptions about the business' future. Making overly optimistic assumptions will mislead the investor into thinking that he is buying at a cheap price, while overly conservative assumptions will result in no investments since everything will then become too expensive.
To keep calculations simple, I will use P/E ratio. The investor's concern will then be on the value of two key variables; the business' future expected earnings and the earnings multiple. For the former, I will use an average of past earnings to smooth out the differences between good and bad years. Earnings used will be based on 'EBIT' as it is the earnings given in the segment results, and then converted to PAT using a percentage of assumed interest and taxes. For the earnings multiple, I will use a multiple of 9x PAT for the less attractive segments, and 14x PAT for the more attractive segments. Since the earnings multiple has the greatest influence on valuation, this is usually a source of (more) debate.
3.1 Valuation of QAF's parts
Since QAF is composed of several business units, it will be easier to value each individually, and then sum them up.
a) Trading and Logistics
A low return, small margins, low growth potential, but stable segment which earned an average EBIT of $3.5m over the past 6 years. Assuming interest and taxes amount to 20% of EBIT, we get average PAT of $2.8m Applying a multiple of 9x on average PAT, this segment is valued at $22.4m.
Trading & Logistics ($m) Revenue EBIT
FY17 108.4 5.0
FY16 105.8 2.9
FY15 104.4 3.5
FY14 101.6 2.9
FY13 96.7 2.5
FY12 92.4 4.0
FY11 89.3 3.1
FY10 84.1 3.7
FY09 74.5 0.7
FY08 94.4 1.2
b) Primary Production
This segment consists mainly of Rivalea and Oxdale, an immaterial subsidiary. It is also a low return, small margins, and low growth potential segment. Business is cyclical, so it is expected to recover eventually. The boom-bust cycles still provide an average EBIT of $12.2m over the past 10 years. A 10 year average is taken to account for a greater range of both the boom and bust periods. Assuming interest and taxes amount to 25% of EBIT, we get an average PAT of $9.1m. Applying a multiple of 9x on average PAT, this segment is valued at $81.9m.
Primary Production ($M) Revenue EBIT
FY17 389.7 14.1
FY16 395.4 42.8
FY15 371.6 16.7
FY14 396.9 10.2
FY13 418.6 2.2
FY12 403.0 6.8
FY11 399.8 9.8
FY10 328.0 9.0
FY09 284.2 33.9
FY08 277.0 -23.3
c) Gardenia Bakeries (KL) Sdn Bhd
It is easier to value GBKL now that it is no longer consolidated into QAF. The 20% GBKL stake that was sold was valued at about 12.2x FY15 PAT. Applying a slightly multiple of 13x on FY17’s PAT of $15.1m, GBKL is valued at $196m. QAF’s 50% stake of GBKL will then be worth $98m. If the remaining 50% of GBKL were to be sold to Padiberas, this valuation multiple should be higher. But it could always get a bad deal, again.
d) Gardenia Singapore and Philippines, and Baker’s Maison
Without GBKL, the remaining bakery segment will consist of Gardenia Singapore and Philippines, and Baker’s Maison (GSPBM). It will then be is necessary to remove GBKL’s results and the licensing fees QAF changed, from the past bakery segment results. QAF’s lost licensing fees were calculated as 3.75% of GBKL’s revenue.
Bakery Segment ($m) FY12 FY13 FY14 FY15 FY16 FY17
EBIT 51.3 51.1 54.0 60.1 32.2 23.0
EBIT less GBKL PBT 37.3 45.9 42.2 43.7 32.2 23.0
EBIT less GBKL & Licensing Fees 26.8 35.0 32.1 33.2 28.7 23.0
Based on these inputs, GSPBM’s adjusted average EBIT over the past 6 years is $30m. Assuming interest and taxes amount to 25% of EBIT, we get an average PAT of $22.5m Taking reference from GBKL’s valuation, and given Philippines’ longer runway for growth, applying a higher multiple of 14x on average PAT will value GSPBM at $315m. Since this is the biggest segment of QAF, the multiple used should be treated even more cautiously.
Summing up the parts, this valuation of QAF is $517.3m, which is only slightly higher than its book value of $508m.
When compared to QAF's latest market price of $365m, QAF is thus selling at a 30% discount to our SOTP valuation. Not entirely exciting.
3.2 Book value comparison
If one is uncomfortable making assumptions future earnings and earnings multiple, comparisons using based on P/B can provide another perspective.
We can compare the P/B of QAF against Auric Pacific. Assuming that QAF is priced at the valuation of $517m, and given QAF last book value of $508m, its P/B will be 1.01. This is lower than Auric Pacific’s 1.22 P/B delisting offer.
We can also compare QAF's present P/B against its past P/B. Based on QAF's current market value of $365m, its present P/B is 0.71. The last time QAF traded this low was in mid-2008. In March 2009, QAF traded at P/B of 0.35; the lowest in the past 10 years. Its highest P/B over the last 10 years was in early 2017, when it traded at P/B of 1.59. If the past is to be relied on, it means QAF is able fall another 50%, or rise by 100%. These figures were manually calculated.
3.3 Peer comparison
To provide some perspective on the earnings multiple used in this exercise, it is useful to look at other companies of similar businesses. Although there are numerous listed F&B operators, few are comparable to QAF, while the comparable ones are not listed. Malaysia’s Massimo and its parent company are not listed. Philippines’ Monde Nissin is also not listed. Auric Pacific – baker of Sunshine and Top One bread – was delisted at P/E of 28 and P/B of 1.2; its bakery and distribution were the only profitable segments, amongst several others. The closest listed competitor – in terms of product type revenue, demographics, and geography – is probably Nippon Indosari of Indonesia. Its level of returns and margins are also similar to QAF’s bakery segment.
Nippon Indosari ROA NPM PAT (billion IDR)
FY17 3.1 5.8 145
FY16 9.5 11.0 279
FY15 9.9 12.4 270
FY14 8.7 10.0 188
FY13 8.6 10.5 158
FY12 12.3 12.5 149
FY11 15.1 14.1 115
FY10 17.4 16.1 99
FY09 16.4 11.7 57
Nippon Indosari’s share price has been between IDR 950 to IDR 1,200 the past year. According to Bloomberg, it currently has 6.19b shares. This translate to a market value of between IDR 5.8 trillion to IDR 7.4 trillion. Using an average of past 6 years’ earnings (IDR 196b), Nippon Indosari has a P/E ratio of between 30 and 38. Based on a book value of IDR 2.7 trillion, it has a P/B of between 2.1 and 2.6.
Indonesia’s market is twice as large as Singapore, Malaysia, and Philippines combined, so that may be the reason for the higher valuation. Valuations of the average growth-company in Indonesia is also generally higher. In any case, this is only one source of comparison, so it should be treated cautiously.
4. The bottom line
Although QAF is facing several issues, the fall in market price seems to be an opportunity for investors.
The pork industry in Australia is cyclical, and will eventually turn profitable again. Gardenia as a brand has accumulated and continues to build plenty of goodwill, which can be drawn upon to deal with future issues, as it had in the past. In Philippines, its earnings will continue to grow together with the development of the economy, albeit at a slower pace, given the entry of a strong competitor. The loss of significant income from divestment of its 20% stake in GBKL will hurt, but it may benefit from a future acquisition of the entire GBKL stake if Padiberas is willing to sell at a fair price. In Singapore, although the market for Gardenia may have matured, it is likely to maintain a steady contribution, as it maintain its market leadership. Furthermore, QAF has a good record of generating free cash flow, reducing borrowing, and paying dividends.
1. Bakeries
The most attractive business of QAF are its bakeries. Its key markets are Singapore, Malaysia, and Philippines for Gardenia; and Australia for Bakers Maison, which sells partially baked pastries to F&B operators. Gardenia has been selling loaves since 1978, and Bakers Maison since 1998. In the past 10 years, the entire bakery division contributed about 80% of QAF’s earnings. During the same period, it never lost money in any year, earned a high profit-before-tax margin that averages 11.8%, and had a high average return (ROA) of 19%. The majority of these margins and returns are assumed to be contributed from Gardenia, since it has a larger market compared to Bakers Maison, and QAF has not revealed any numbers for Bakers Maison.
1.1 So Good, Your Competitors are Not Letting You Eat it On Your Own
Bread loaves are simple to produce, and there are many bakeries – ranging from the neighbourhood family-owned stores to larger chains such as BreadTalk and Four Leaves – producing and selling their own loaves, within the store premises or (partially) baked in a central kitchen. The difference between these retail bakeries and Gardenia is that Gardenia produces its loaves in bigger quantities, using fully automated processes, from mixing to packaging. The trade-off on lower production cost – which is where the smaller bakeries exploit – is its lack of variety and freshness.
Even though Gardenia competes with retail bakeries, it still has its market of more price-sensitive consumers. A $2 sandwich loaf can provide for a person’s breakfast over 4-6 days, while the same amount can only buy 1.5 bun from a retail bakery. Bakeries of different scale and product varieties compete in largely separate markets. The bigger worry for Gardenia, are not the retail bakeries, but the other low-cost sandwich loaf bakers.
In Singapore, Gardenia claims that it continues to be the top selling brand by sales value and volume. Outside of Singapore, not all has been going well for Gardenia’s business.
a) Spectre of affirmative action
In 1986, QAF entered the Malaysian bread market and has since expanded to 5 factories. Publicly available information shows QAF’s Malaysian subsidiary – Gardenia Bakeries (KL) Sdn Bhd (or GBKL) – to be a reliable and satisfactory performer.
Gardenia Bakeries (KL) Sdn Bhd
(in $m) Revenue PAT NPM (%) Assets ROA (%)
FY17 285.1 15.1 5.3 119.5 12.6
FY16 (9m) 207.0 12.7 6.1 119.4 10.6
FY15 279.3 12.3 4.4 104.5 11.7
FY14 297.9 10.7 3.6 109.5 9.7
FY13 291.7 3.7 1.2 103.0 3.6
FY12 281.3 10.4 3.7 103.0 10.0
But due to Malaysia’s New Economic Policy of 1971 – which required QAF to sell 70% of its shares in GBKL to local Malay persons or owned entities, over a period of time – QAF sold 30% of GBKL for RM55m (or $25m, at then exchange rate) in 2001 to Padiberas Nasional, a rice processor and distributor. In 2016, another 20% was sold to Padiberas Nasional for RM90m (or $30m). QAF negotiated with Malaysia's Ministry of International Trade and Industry – the agency which enforces the foreign ownership rules – to allow QAF to retain a 50% stake of its Malaysian business. But this may have come at a high price.
QAF charges licensing fees to GBKL for the production of Gardenia bread. Prior to the 2016 deal with Padiberas Nasional, the licensing fees stood at 5.25% of GBKL’s revenue. Compared to the average manufacturing license fees, this is considered high. And may have been QAF’s strategy to ensure it earns a 5.25% margin on GBKL’s sales, in the event it is forced to dispose their controlling stake, as they must have anticipated. But this ultimately failed to retain QAF’s ability extract earnings from GBKL, if it were indeed intended as such. As part of the 2016 deal with Padiberas Nasional, the licensing fees were re-negotiated down to only 1.5%. The financial impact of this on QAF is significant. Based on GBKL’s revenue of $285.1m in 2017, the loss of licensing fees amount to $10.6m for QAF; far more damaging than the loss of a 20% stake on $15.1m of profit for the same year. The combined financial impact of the 20% stake sale and reduced licensing fees resulted in far lower earnings for the entire bakery segment; $3m from 20% of GBKL’s profits and $10.6m from lost licensing fees.
Bakery Segment Results
(in $m) Revenue EBIT EBITM (%) Assets ROA (%)
FY17 337.0 23.1 6.8 387.3 5.9
FY16 375.5 32.2 8.6 364.6 8.8
FY15 511.5 60.1 11.7 329.2 18.2
FY14 506.4 54.0 10.6 307.7 17.5
FY13 493.8 51.6 10.4 280.9 18.3
FY12 473.6 51.3 10.8 292.7 17.5
The lost licensing fees may be partially compensated by a consequent rise in GBKL’s profit, which QAF owns 50%, provided that GBKL’s lower licensing fees translate into higher margins. Comparison of FY16 and FY17 figures has not shown this to be the case. Perhaps GBKL’s FY17 results would have been worse without the lower licensing fees, or perhaps the ‘savings’ have been spent elsewhere. In addition, as part of the stake sale agreement with Padiberas, QAF had to purchase a 10 acre land – located next to GBKL’s existing factory in Bukit Kemuning Selangor – from Padiberas, which it paid $10.3m for. To summarise the deal, QAF sold a high return asset for $30m, bought a low return one for $10m, and lost $10m of recurring income. A common critique of the NEP and its affirmative action policies is that the beneficiaries were rarely the average person, but mostly elites and allies associated with BN. QAF should make new friends with the other local godfathers.
b) No home advantage
Perhaps it was in anticipation of this loss of income that, in late 2014, QAF’s 55%-owned subsidiary Gaoyuan Group started a Gardenia factory in Fujian, China. It operated 3 production lines and distributed to 9 cities in the vicinity. But the venture was unsuccessful. In spite of its vast production and marketing experience, the business incurred losses totalling $24.5m over the next three years. The factory ceased operations in December 2017.
Gaoyuan Group
(in $m) Revenue PAT
FY17 6.4 -6.1
FY16 5.8 -13.2
FY15 3.6 -5.2
The other 45% of Gaoyuan Group is owned by Andree’s son, Lin Kejian (or Daniel Halim). Why did the venture have such an ownership structure? Was the Board not completely supportive of the venture? Was Daniel this his rite of passage?
c) Brothers fight all the time
The remaining ASEAN countries where QAF had no footprint are: Indonesia, Cambodia, Vietnam, Laos, and Myanmar. Except for Indonesia, there are few foreign companies selling consumer goods in these countries, and it is rare to even find modern convenience stores. It may yet take some time before foreign companies like Gardenia are welcome.
In Indonesia, Nippon Indosari is one of the players in the packaged bread market with its Sari Roti brand. Sari Roti is distributed through Indomaret, a convenience store chain controlled by Anthony Salim. Indoritel Makmur (Indomaret) also has a 25% stake in Nippon Indosari. Will Andree and son enter the Indonesian market to compete with his brother? Given Andree’s less aggressive personality, his son Daniel’s lack of a strong track record, it seems unlikely. But for Anthony, it is quite the opposite.
Nippon Indosari is expanding into QAF’s turf in Philippines. In February 2016, it announced a joint venture with Monde Nissin, one of the largest food manufacturer in Philippines. Their plant was completed this year, and their bread can now be found in convenience stores in Metro Manila. Through First Pacific, Anthony also controls PLDT – Philippines’ largest telco – so he is no stranger to doing business in Philippines. Back in Indonesia, Indomaret also distributes a brand called Prime Bread, whose packaging and logo looks suspiciously similar to Gardenia’s. It might have been too much to expect Andree to have the support of godfathers in Malaysia, when he doesn’t even have the support of his own brother.
d) Hastening expansion across Philippines
As QAF has no more room to expand in Singapore, lost income in Malaysia, failed in both Thailand and China, its best remaining bet for near-term growth lies in Philippines. In 1998, QAF built a Gardenia factory in Cebu, located roughly in the middle of Philippines’ sprawling islands. A decade later, it added another plant in Laguna, located in northern Philippines. Throughout the years, production lines were gradually added as sales increased, but QAF hastened the expansion when it must have been clear that they were about to lose a significant portion of their Malaysia-sourced income, and that dear brother is building a plant in his key market. In November 2015 – about a year before QAF’s deal with Padiberas Nasional – QAF constructed another plant in Laguna. In 2016, it announced the construction of two new plants; one in Mindanao, located in southern Philippines, and another in Luzon, located in northern Philippines.
Although QAF’s Philippines revenue are growing steadily, there are no publicly available income figures.
Philippines FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17
Revenue ($m) 87 102 108 114 120 140 160 173
1.2 Are there only crumbs left?
Loss of income in Malaysia, failure to expand into new markets, and impending competition in Philippines. Gardenia’s prospects certainly isn’t looking great. But it still has three redeeming qualities worth considering.
a) Goodwill
An ideal environment for a business is one where it has none or few competitors. Having competition – whether it is from Sunshine and/or retail bakeries in Singapore, Massimo in Malaysia, and Sari Roti in Philippines – is par for the course. Gardenia’s ability to manage competition, and the strength of the goodwill they have been building, was put to the test in Malaysia from 2012 to 2013.
In early 2012, a boycott of Gardenia’s products were started by several netizens and its message ‘went viral.’ The boycott, mainly written in Mandarin, claimed that GBKL discriminated against Malayan Flour Mills – which is controlled by Robert Kuok – by not buying flour from them. It further argued that buying Gardenia bread is a show of support for UMNO, as Padiberas Nasional is controlled by Syed Mohktar, a godfather who has received plenty of business and support from the government. Perhaps coincidentally, the boycott surfaced just months after Massimo entered the market in late 2011. To capture market share, Massimo priced its bread loaf at RM2.50 – compared to Gardenia which was selling at RM3.50 – for the next two years. GBKL’s earnings took a hit in FY13, but as Massimo stopped selling bread at a large discount, GBKL’s earning recovered and continued to grow.
Another competitor – High-5, who has been around since 1960 – did not survive. Just months after Massimo’s entry, financial malfeasance was uncovered by its auditor Baker Tilly Monteiro Heng to the tune of RM297m. The financial hole eventually led to cuts in production and distribution. Its effort to return to profitability with a new manager and some equity injection also failed. It was delisted in 2014, and finally closed shop in June 2016. The timing of Massimo’s entry into the market could not have been better.
b) Growth potential of developing economies
Although substantial licensing fees were lost in Malaysia, QAF still has a 50% stake in GBKL. Part of the deal with Padiberas Nasional includes the listing of GBKL, or complete acquisition of either party’s stake, by 2026. As consumer spending gradually increase in Malaysia, GBKL stands to improve its earnings if it is able to maintain, if not increase, its share of the market. When the time comes for QAF to either dispose or acquire the remaining stakes of GBKL, QAF will stand to benefit from GBKL’s higher earnings. Of course, this is provided that the terms – whether on disposal or acquisition – are not prejudicial to QAF.
In Philippines, Gardenia has been around for 20 years. So it should have built up sufficient goodwill and operating experience to take on competition. Although Gardenia’s share of the market may now be limited, the growing Philippines economy will enlarge the pie for both players. Philippines’ population is three times the size of Malaysia’s, while its GDP per capita is only a third of Malaysia’s. So there’s plenty of room for consumer spending, and Gardenia, to grow.
c) Strong financial position
Although Andree is less aggressive as a businessman, his financial conservatism makes QAF a steady ship. For Gardenia, that means a firm footing in fending off competition. Over the past decade, QAF has been gradually reducing its borrowings to a conservative level, while consistently maintaining a healthy level of free cash flow.
QAF Loan to Asset (%) FCF ($m)
FY17 13.7 24.9
FY16 11.1 35.6
FY15 12.7 27.0
FY14 20.9 49.0
FY13 13.3 40.1
FY12 16.8 6.3
FY11 15.5 28.5
FY10 16.5 45.4
FY09 21.3 51.4
FY08 29.4 64.0
2. Pig Farming & Pork Processing
The second – and less attractive – business of QAF is its pork business, Rivalea. In the production of pork, Rivalea mills the grains which are fed to the pigs, rear the pigs by providing feed, vaccine, and shelter, and then slaughter the pigs after they have grown adequately. The processed pork – bacon, ham, belly, shoulder, loin, etc – is then sold to restaurants, hotels, caterers, supermarkets, and other food establishments in Australia and Asia. Presently, Rivalea produces about 17%, and processes about 24%, of the pork sold in Australia. This does not seem to have changed much since QAF’s acquisition of Rivalea (then Bunge Meats) in 2002.
2.1 The pock marks
Compared to the bread business, Rivalea is far less profitable. In the past 10 years, Rivalea contributed about 8% of QAF’s earnings. During the same period, it lost money in 2009, earns a low profit-before-tax margin that averages 3.1%, and a return (ROA) that averages 4.7%. There are four reasons for this, and the inverse may explain the comparatively better performance of the bread business.
a) Labour and land intensive
The low technology requirement means there are numerous competitors in the pork production industry, just as it is in bread production. But unlike bread production – where QAF can overcome its competitors with larger facilities and automation – the numerous tasks required in ensuring healthy growth of a pig places a limit to lowering production costs that can be achieved through automation and larger facilities. For example, although there are now automated feeding and cleaning systems in pig farms, humans are still required to inspect the health of the pigs, provide vaccines, provide treatment to those infected with diseases, and to remove the carcass of those that have died. A farm with a larger herd will therefore require proportionately more labour. In the processing of pork, although modern facilities have automated lines to wash and move the carcasses, the task of removing the entrails and unwanted parts, and butchering the carcass into smaller marketable parts, are still performed by humans.
In addition, a larger herd will also require proportionately more sheds to house the pigs, which means more land is required, translating into higher land ownership/rental costs. QAF’s feed milling, pig farming, and pork processing operates over 7,600 hectares, or 76 square kilometres of land; equivalent to 10 times the size of Bishan.
b) Sensitive to feed cost
Feed is the largest cost component in rearing pigs. Pig feed is mainly composed of corn, soybean and wheat. Any event leading to a rise in the price of these crops will increase the cost of QAF’s pork business. Such event may include extreme weather change leading to a poor harvest – in Australia and/or other regions which grow these crops – or an increase in demand for these crops from other countries and/or users. The unstable earnings of QAF’s pork business over the past 10 years is a good illustration of its vulnerability to not only periods of pork oversupply, but also periods of higher feed cost. While the current recession in pork prices is unlikely to have any lasting damage to QAF’s pork business, there will be the occasional drought leading to a poor grain harvest, resulting in higher feed cost.
c) Little product differentiation
If Rivalea had been able to price its products with a fat margin, concerns of land, labour, and feed costs could easily be mitigated. But customers of Rivalea’s pork products are indifferent of who reared the pigs, or processed the pork, so long as the pork are of acceptable quality and price. This means that the food and beverage operators who buy Rivalea’s pork – such as restaurants and supermarkets – will consider buying from other suppliers if there are others selling pork of the same quality, but at a lower price. In addition, the rearing of pigs is simple and can be done by just about anyone with some effort and equipment, allowing many entrants into the industry. QAF’s management is aware of the problem, and has since 2010 stated their intention to increase its margins on pork products by selling more fresh pork, and by increasing the brand value of their pork products. So far, there is little evidence of success.
d) Occasional market imbalance
The high pork prices from 2015 to 2016 led pig farmers to increase pig production to an extent where market demand for pork since 2017 could not keep up with its supply. As the selling price of pigs has fallen to levels which are lower than how much it cost to rear them, there has been reports of pig farmers culling (killing) their piglets, so that they no longer have to ‘waste money’ feeding them.
The present oversupply situation is worsened because there are few overseas buyers for Australian pork. As a developed country, the cost of production of pork in Australia is higher than other countries in the region such as Vietnam and Thailand. And since Australia is located far from the main pork markets of United States, Europe, and Japan, the added cost of shipping Australian pork to these markets makes Australian pork expensive compared to their local producers. Furthermore, although China is the world’s largest pork consumer, there are no existing trade agreements which allow Australian pork to be sold in China. Andrew Spencer, CEO of Australian Pork Limited, expects such a trade agreement to be in place no earlier than 2020. Even if China opens its pork market, Australia’s higher cost of production makes it uncompetitive to producers from other countries. Presently, only a very small percentage of Australian pork is exported.
2.2 Is it as ugly as it looks?
The inefficiencies of operations, difficulties in product differentiation, and occasional market imbalances gives the pork business poor returns. This may have been the reason that prompted QAF’s management to propose selling 49% of the shares of Rivalea through an IPO on ASX, in late 2017. But only two months later, management announced its decision to halt the share sale; the likely reason being insufficient market interest in pork businesses. After all, the period when it proposed the share sale coincided with the pork oversupply in Australia. Yet, this was not the only time QAF tried to offload its pork business; it previously announced its intention to list the business in late 2010.
It is unknown when pork prices will recover. But since fresh pork imports are not allowed in Australia – only a small quantity of processed pork is imported – local producers like Rivalea is shielded from even lower-priced overseas competitors. And since pork consumption in Australia is stable and increasing, the pork oversupply situation will eventually resolve as producers continue to decrease production when it is unprofitable, or exit the industry. Due to the low returns of most agriculture and animal husbandry business, leverage is commonly used to juice up returns. QAF appears to have been conservative in this aspect, which increases the probability of Rivalea’s ability to remain a going concern regardless of the industry condition. So QAF should have no problem waiting for the industry to recover. And when it does, QAF may finally unlock (some) value of Rivalea, if it doesn’t change its mind.
3. Valuation
Having looked under the hood and kicked the tyres, the final step involve deciding how much it is worth. Performing valuations are difficult and tricky because it involves making assumptions about the business' future. Making overly optimistic assumptions will mislead the investor into thinking that he is buying at a cheap price, while overly conservative assumptions will result in no investments since everything will then become too expensive.
To keep calculations simple, I will use P/E ratio. The investor's concern will then be on the value of two key variables; the business' future expected earnings and the earnings multiple. For the former, I will use an average of past earnings to smooth out the differences between good and bad years. Earnings used will be based on 'EBIT' as it is the earnings given in the segment results, and then converted to PAT using a percentage of assumed interest and taxes. For the earnings multiple, I will use a multiple of 9x PAT for the less attractive segments, and 14x PAT for the more attractive segments. Since the earnings multiple has the greatest influence on valuation, this is usually a source of (more) debate.
3.1 Valuation of QAF's parts
Since QAF is composed of several business units, it will be easier to value each individually, and then sum them up.
a) Trading and Logistics
A low return, small margins, low growth potential, but stable segment which earned an average EBIT of $3.5m over the past 6 years. Assuming interest and taxes amount to 20% of EBIT, we get average PAT of $2.8m Applying a multiple of 9x on average PAT, this segment is valued at $22.4m.
Trading & Logistics ($m) Revenue EBIT
FY17 108.4 5.0
FY16 105.8 2.9
FY15 104.4 3.5
FY14 101.6 2.9
FY13 96.7 2.5
FY12 92.4 4.0
FY11 89.3 3.1
FY10 84.1 3.7
FY09 74.5 0.7
FY08 94.4 1.2
b) Primary Production
This segment consists mainly of Rivalea and Oxdale, an immaterial subsidiary. It is also a low return, small margins, and low growth potential segment. Business is cyclical, so it is expected to recover eventually. The boom-bust cycles still provide an average EBIT of $12.2m over the past 10 years. A 10 year average is taken to account for a greater range of both the boom and bust periods. Assuming interest and taxes amount to 25% of EBIT, we get an average PAT of $9.1m. Applying a multiple of 9x on average PAT, this segment is valued at $81.9m.
Primary Production ($M) Revenue EBIT
FY17 389.7 14.1
FY16 395.4 42.8
FY15 371.6 16.7
FY14 396.9 10.2
FY13 418.6 2.2
FY12 403.0 6.8
FY11 399.8 9.8
FY10 328.0 9.0
FY09 284.2 33.9
FY08 277.0 -23.3
c) Gardenia Bakeries (KL) Sdn Bhd
It is easier to value GBKL now that it is no longer consolidated into QAF. The 20% GBKL stake that was sold was valued at about 12.2x FY15 PAT. Applying a slightly multiple of 13x on FY17’s PAT of $15.1m, GBKL is valued at $196m. QAF’s 50% stake of GBKL will then be worth $98m. If the remaining 50% of GBKL were to be sold to Padiberas, this valuation multiple should be higher. But it could always get a bad deal, again.
d) Gardenia Singapore and Philippines, and Baker’s Maison
Without GBKL, the remaining bakery segment will consist of Gardenia Singapore and Philippines, and Baker’s Maison (GSPBM). It will then be is necessary to remove GBKL’s results and the licensing fees QAF changed, from the past bakery segment results. QAF’s lost licensing fees were calculated as 3.75% of GBKL’s revenue.
Bakery Segment ($m) FY12 FY13 FY14 FY15 FY16 FY17
EBIT 51.3 51.1 54.0 60.1 32.2 23.0
EBIT less GBKL PBT 37.3 45.9 42.2 43.7 32.2 23.0
EBIT less GBKL & Licensing Fees 26.8 35.0 32.1 33.2 28.7 23.0
Based on these inputs, GSPBM’s adjusted average EBIT over the past 6 years is $30m. Assuming interest and taxes amount to 25% of EBIT, we get an average PAT of $22.5m Taking reference from GBKL’s valuation, and given Philippines’ longer runway for growth, applying a higher multiple of 14x on average PAT will value GSPBM at $315m. Since this is the biggest segment of QAF, the multiple used should be treated even more cautiously.
Summing up the parts, this valuation of QAF is $517.3m, which is only slightly higher than its book value of $508m.
When compared to QAF's latest market price of $365m, QAF is thus selling at a 30% discount to our SOTP valuation. Not entirely exciting.
3.2 Book value comparison
If one is uncomfortable making assumptions future earnings and earnings multiple, comparisons using based on P/B can provide another perspective.
We can compare the P/B of QAF against Auric Pacific. Assuming that QAF is priced at the valuation of $517m, and given QAF last book value of $508m, its P/B will be 1.01. This is lower than Auric Pacific’s 1.22 P/B delisting offer.
We can also compare QAF's present P/B against its past P/B. Based on QAF's current market value of $365m, its present P/B is 0.71. The last time QAF traded this low was in mid-2008. In March 2009, QAF traded at P/B of 0.35; the lowest in the past 10 years. Its highest P/B over the last 10 years was in early 2017, when it traded at P/B of 1.59. If the past is to be relied on, it means QAF is able fall another 50%, or rise by 100%. These figures were manually calculated.
3.3 Peer comparison
To provide some perspective on the earnings multiple used in this exercise, it is useful to look at other companies of similar businesses. Although there are numerous listed F&B operators, few are comparable to QAF, while the comparable ones are not listed. Malaysia’s Massimo and its parent company are not listed. Philippines’ Monde Nissin is also not listed. Auric Pacific – baker of Sunshine and Top One bread – was delisted at P/E of 28 and P/B of 1.2; its bakery and distribution were the only profitable segments, amongst several others. The closest listed competitor – in terms of product type revenue, demographics, and geography – is probably Nippon Indosari of Indonesia. Its level of returns and margins are also similar to QAF’s bakery segment.
Nippon Indosari ROA NPM PAT (billion IDR)
FY17 3.1 5.8 145
FY16 9.5 11.0 279
FY15 9.9 12.4 270
FY14 8.7 10.0 188
FY13 8.6 10.5 158
FY12 12.3 12.5 149
FY11 15.1 14.1 115
FY10 17.4 16.1 99
FY09 16.4 11.7 57
Nippon Indosari’s share price has been between IDR 950 to IDR 1,200 the past year. According to Bloomberg, it currently has 6.19b shares. This translate to a market value of between IDR 5.8 trillion to IDR 7.4 trillion. Using an average of past 6 years’ earnings (IDR 196b), Nippon Indosari has a P/E ratio of between 30 and 38. Based on a book value of IDR 2.7 trillion, it has a P/B of between 2.1 and 2.6.
Indonesia’s market is twice as large as Singapore, Malaysia, and Philippines combined, so that may be the reason for the higher valuation. Valuations of the average growth-company in Indonesia is also generally higher. In any case, this is only one source of comparison, so it should be treated cautiously.
4. The bottom line
Although QAF is facing several issues, the fall in market price seems to be an opportunity for investors.
The pork industry in Australia is cyclical, and will eventually turn profitable again. Gardenia as a brand has accumulated and continues to build plenty of goodwill, which can be drawn upon to deal with future issues, as it had in the past. In Philippines, its earnings will continue to grow together with the development of the economy, albeit at a slower pace, given the entry of a strong competitor. The loss of significant income from divestment of its 20% stake in GBKL will hurt, but it may benefit from a future acquisition of the entire GBKL stake if Padiberas is willing to sell at a fair price. In Singapore, although the market for Gardenia may have matured, it is likely to maintain a steady contribution, as it maintain its market leadership. Furthermore, QAF has a good record of generating free cash flow, reducing borrowing, and paying dividends.
