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QAF's profit guidance
When insurance become new income
QAF Limited engages in the manufacture and distribution of bread, bakery, and confectionery products in Singapore, Australia, the Philippines, Malaysia, and internationally.
The business is interesting as they do command a substantial market share in some of the markets they are operating in.
In 2016, they had to divest a portion of their shareholding in their Malaysian business to comply with local regulation.
It’s been a few trying years since the divesture of their Malaysian’s operation. The quality of the business had worsen since then.
ROE had dropped from 25.2% (2016) to 4.2% (2021). Instead of consolidating their market leading position in bread, the general feel is that their brands below had lost edge to the independent bakeries.
In 2021, QAF finally managed to sell off their primary production facilities (pork processing facilities) in Australia to focus on their bread, bakery, and confectionery business.
On 20th July, QAF issued a profit guidance (QAF Announcement - Profit Guidance_20 July 2022_Final.ashx (sgx.com)) report a significant improvement in the Group’s profit before tax and profit after tax and after exceptional items for 1H2022 compared to 1H2021.
"The significant improvement is attributable to an exceptional item relating to the receipt of approximately S$9.6 million (equivalent to RM30 million), being the first interim insurance payment under the Group’s insurance policy covering damage to its property, plant and equipment in connection with the severe flooding at one of the Group’s Malaysian factories."
So this is not exactly a better half year result for QAF…
So what could trigger a revival in their operation and financial?
Operating cost like raw material cost and fuel will be rapidly rising for the year ahead.
Business headwind such as changing consumption pattern will continue to crimp revenue growth.
Since the option of increasing margin or increasing sales per dollar employed looks increasingly out of reach, it should continue to be tough for QAF in the years ahead.
Price at around 1x net asset, QAF seems relatively cheap for a dominant business in a growing region but the trends for the next few years should look increasingly like the last few years.