QAF

[pianist]

The recent financial has made a well detailed and convincing description of their Australian rivalea business, that i thought was a good mix to their bakery and distribution business, but towards the end the management sounded an anti climax by saying they like to sell off the rivalea business. This is abit puzzling considering they have spent so much investments time resources and expertise to finally created an end to end ecosystem for their stock feed, production, processing and R&D that they claimed was value adding into the community.

[Mushy]

Lately we have been talking much on the pri production business of QAF. I would like to ask a question to all valuebuddies that I had been pondering on the bakery business of QAF. Does QAF limited owns the Gardenia brand 100%? We know QAF makes and sells Gardenia bread in the 3 main countries of Singapore, Philippines and West Malaysia (50% owned GBKL). Does it own the rights to the Gardenia brand in other countries like Indonesia, East Malaysia and other ASEAN countries? I thought it does until recently I read about a Malaysia listed company KTC taking over the Gardenia Bakeries in East malaysia from another Malaysian company Tong Hing. In addition, KTC will also take over the exclusive rights to use the gardenia brand in Indonesia from an entity call Gardenia International, and expand into the Indonesia market. All these for 10 years.

What do these developments means for QAF?
Is there any link between the East Malaysia Gardenia bakery and QAF (through GBKL)? Did Tong Hing (and now KTC) need to pay royalty?
Is gardenia International (whom held the rights to Gardenia brand in Indonesia) linked to gardenia International (S) Pte Ltd which is 100% owned by QAF limited (Ref 2018 AR)?
QAF did not make any announcement regarding these developments and I had not been able to find the answers in QAF documents and internet.

https://www.theborneopost.com/2020/01/23...-gardenia/

QAF had answered my queries through email as below. 1990 annual report. I only checked 2018 AR.
KTC is very small. Doubt they can do anything to challenge the other Salim in Indonesia. East Malaysia is a very small market.

QAF had previously publicly disclosed, amongst others, its acquisition of ownership to the [i]“Gardenia” trademark, with the exception of Indonesia, Sabah, Sarawak and Brunei. The 1990 annual report of QAF at the time of the acquisition, contained this information. [/i]

 

We will be covering this matter again in our upcoming FY2019 Annual Report.

[Mushy]

"Preliminary supply and demand projections for wheat in 2020/21 point to an all-time high for production and a further build-up of stocks, but with inventory growth again concentrated in China and India."
Source: International Grains Council Feb 2020 report

There is potential for wheat (flour) prices to be lower and this can improve margins for QAF bakery business.
People still need to eat whether pandemic or not. The changes are not in the quantity. We still eat x meals a day. Obviously dining out is heavily impacted.
I have no proof but I think factory packaged bread would not have a negative impact in the current covid19 environment.
In my household we now have a tendency to go for factory packed food which has a more consistent hygienic standard than shop packed food. We prefer packaged bread compared to boutique bakery (example breadtalk). The latter bread are exposed to the public before packaging and there is no control available. We have seen folks placing foreign stuffs like coins and notes on the trays that the naked bread are placed and many more stories. Packaged bread has a longer shelf life and is suitable for stocking up. Never mind the debates about preservatives at the moment.

On the other hand, australian pork prices (and in other major countires) have seen a stabilisation in recent weeks. Demand in China had dropped and this has an impact on the global export prices and then on Aus prices. I am saying prices remain high, but no indication they will continue like that. Maybe more good news will come from the feed prices.
Source: APL, ABARES

[nitro]

AR2019 - Some highlights

1. Bakery Phillippines
Significant plant investments in the Philippines are bearing results with sales increasing by 13% in 2019 over the
previous year. With more extensive coverage of provinces further away from main cities, sales and distribution costs
were higher with number of delivery trucks and sales routes increasing by 25% over 2018. Although there were
new entrants in the competitive bread industry, Gardenia Phillippines was able to effectively counter the competition
and maintained its market share with clear execution of its business strategy. In 2020, the focus will be to consolidate
operations and improve efficiencies.

Phillippines numbers improving from $183m (2018) to $208m (2019) despite all the ongoing marketing costs.

2. Primary Production

Rivalea’s trading result for 2019 ultimately exceeded expectations as industry pig supply contracted throughout the year and pork prices increased significantly towards the later part of the year. The final result was an operating profit before tax of S$8.9 million in 2019 compared with a loss of S$11.7 million in 2018

Having owned the Primary Production business since 2001, the business has reached the necessary scale and is
now an ideal platform for a new owner with a strong focus on the animal protein segment to bring it to its next growth
phase and take the business to the next level.

If a sale materializes, we intend to recycle some of the proceeds into growing the core Bakery and Distribution and Warehousing businesses of Singapore, Malaysia and the Philippines, within the growing 650 million population of ASEAN countries.

[pianist]

AR2019 - Some highlights

1. Bakery Phillippines
Significant plant investments in the Philippines are bearing results with sales increasing by 13% in 2019 over the
previous year. With more extensive coverage of provinces further away from main cities, sales and distribution costs
were higher with number of delivery trucks and sales routes increasing by 25% over 2018. Although there were
new entrants in the competitive bread industry, Gardenia Phillippines was able to effectively counter the competition
and maintained its market share with clear execution of its business strategy. In 2020, the focus will be to consolidate
operations and improve efficiencies.

Phillippines numbers improving from $183m (2018) to $208m (2019) despite all the ongoing marketing costs.

2. Primary Production

Rivalea’s trading result for 2019 ultimately exceeded expectations as industry pig supply contracted throughout the year and pork prices increased significantly towards the later part of the year. The final result was an operating profit before tax of S$8.9 million in 2019 compared with a loss of S$11.7 million in 2018

Having owned the Primary Production business since 2001, the business has reached the necessary scale and is
now an ideal platform for a new owner with a strong focus on the animal protein segment to bring it to its next growth
phase and take the business to the next level.

If a sale materializes, we intend to recycle some of the proceeds into growing the core Bakery and Distribution and Warehousing businesses of Singapore, Malaysia and the Philippines, within the growing 650 million population of ASEAN countries.

With rivalled making gd profits, they should keep this strategic asset

[Mushy]

Fresh pork prices in Australia had been consistently slowly decreasing.
The last 2 weeks had seen a more material drop of around 5%.
Feed prices are stable but still at ten year high since 2018.
Ref: APL market reporting

It seems to be more of a supply chain disruption issue (due to covid19) than a change in Australian appetite (Australians consumption of pork had been steadily increasing before 2020). Hence this may be temporary. For how long? News articles say Australia may keep covid19 restrictions for a year. 

"The effective shut-down of the foodservice industry, representing 26 per cent of our market, has created significant supply chain disruption. Many producers are now facing a drop in prices, especially where exposure to the wholesale and foodservice supply chain is greatest."
APL forecast an oversupply of processed pigs in the coming weeks.
Ref: APL CoVID-19 producer update (7 April 2020)

QAF (Rivalea) had projected an ebitda of AUD 43 million for FY2020 (ref AR2019) in its sales pitch to sell the pri production business. The only thing i read is that they are trying to sell (4q results and 2019 AR), but never anything that there is anyone interested. I have been searching on internet for many months and nothing. Pls share if you know.
Not sure if this ebitda projection takes into account possible degradation of pork prices and sales volume due to extended covid19 disruption.

They never managed to sell or IPO the business in so many years. With the current negative climate in M&A and the possible restrictions if potential buyer is non-australian, I think it will be very challenging to both find a buyer and to get a good price. I say challenging but not impossible since QAF itself is not australian. The Aus govt and people may not be happy if its top pork producer were to be sold amidst the current climate that places food security as critical. SGX acquisition of ASX never went past the initial stages.

Hence I think long term investors in QAF like myself have to take into consideration of QAF being stuck with the cyclical business of Rivalea.

[¯|_(ツ)_/¯]

25 July 2020 Temporary closure of Diamond Valley Plat
https://links.sgx.com/FileOpen/Announcem...eID=625014

"Rivalea’s 80%-owned meat processing subsidiary, Diamond Valley Pork Pty Ltd (“DVP”), has temporarily shut down its processing plant in Laverton, Melbourne with immediate effect. Five employees at the plant have to-date recorded positive Covid-19 test results. As a proactive step, DVP has voluntarily elected to undertake Covid-19 testing of all of its workforce. The shutdown is for a currently undetermined temporary duration."

Wear mask and keep your social distance, everyone.

[Squirrel]

Fresh pork prices in Australia had been consistently slowly decreasing.
The last 2 weeks had seen a more material drop of around 5%.
Feed prices are stable but still at ten year high since 2018.
Ref: APL market reporting

It seems to be more of a supply chain disruption issue (due to covid19) than a change in Australian appetite (Australians consumption of pork had been steadily increasing before 2020). Hence this may be temporary. For how long? News articles say Australia may keep covid19 restrictions for a year. 

"The effective shut-down of the foodservice industry, representing 26 per cent of our market, has created significant supply chain disruption. Many producers are now facing a drop in prices, especially where exposure to the wholesale and foodservice supply chain is greatest."
APL forecast an oversupply of processed pigs in the coming weeks.
Ref: APL CoVID-19 producer update (7 April 2020)

QAF (Rivalea) had projected an ebitda of AUD 43 million for FY2020 (ref AR2019) in its sales pitch to sell the pri production business. The only thing i read is that they are trying to sell (4q results and 2019 AR), but never anything that there is anyone interested. I have been searching on internet for many months and nothing. Pls share if you know.
Not sure if this ebitda projection takes into account possible degradation of pork prices and sales volume due to extended covid19 disruption.

They never managed to sell or IPO the business in so many years. With the current negative climate in M&A and the possible restrictions if potential buyer is non-australian, I think it will be very challenging to both find a buyer and to get a good price. I say challenging but not impossible since QAF itself is not australian. The Aus govt and people may not be happy if its top pork producer were to be sold amidst the current climate that places food security as critical. SGX acquisition of ASX never went past the initial stages.

Hence I think long term investors in QAF like myself have to take into consideration of QAF being stuck with the cyclical business of Rivalea.

Since Victoria went back into a lock down, demand would probably not go back up any time soon. International lean hog prices have been on the decline as well. From my personal point of view it doesn't seem possible for QAF to sell off Rivalea in the short term. I am not sure why in the latest update, they have not shifted much on their expectations for EBITDA on the primary production sector. Perhaps that's on the back of cheaper feed wheat and the expectation of a bumper wheat harvest for 2020 winter crop.

With that said, this company has unfortunately come into my trim list in order to raise my cash holdings, so I am out! This is very unusual times, and I can't align the optimism in the stock market versus the underlying fundamentals. Wishing the best for all valuebuddies here!

[Squirrel]

And btw, Victoria is set to announcement more measures as per following article

https://www.theguardian.com/australia-ne...e-covid-19

an excerpt from the article

"The ABC’s Insiders program reported that the stage 4 lockdown was likely to include further restrictions affecting retail outlets, abattoirs and call centres, while restaurants and cafes would be allowed to offer takeaway if they abide by “strict contactless service provisions”. The ABC reported that there could be some restrictions on the operation of Uber and taxi services – and that the tougher restrictions would apply beyond metropolitan Melbourne."

We should know for sure what is going to happen by end of today.

[¯|_(ツ)_/¯]

Trading halt.
https://links.sgx.com/1.0.0/corporate-an...f16261b3c6

Stay home and stay safe, everyone.