QAF Limited - OCBC Securities 2015-09-18: Inexpensive stock offers 5% dividend yield


QAF Limited: Inexpensive stock offers 5% dividend yield 

 Dominant position in core markets 
 Positive outlook for bakery and pork production industry 
 Trading below peers’ averages 

Established market leader in baked goods and pork production 

  • QAF Limited (QAF) is primarily engaged in bakery manufacturing and distribution with leading brands Gardenia and Bonjour, while it also owns the largest fully integrated pork production business in Australia under Rivalea. The group’s bakery brands command 60% of market share under the packaged loaf bread segment in Singapore. 
  • Within a broader baked goods segment (i.e. bread, cakes, pastries), they are leaders in their core markets with market share of 26%, 18%, and 11% in Singapore, Malaysia and Philippines respectively. 

Profitability expected to continue improving 

  • We note that both of the group’s core businesses hold competitive strengths such as branding power, value-added product portfolio, as well as extensive distribution networks in its core markets. The group leverages on its knowledge and research capabilities to launch new products as well as productivity initiatives to garner better margins. 
  • We estimate that core PATMI on a group level has been relatively steadier since FY11, vs. a seemingly bumpy net profit performance. Both core business segments are recording gradual signs of recovery in terms of EBIT and they continue to improve as of 1H15. 
  • Expansion of facilities coupled with extension of its distribution reach in other markets would help to drive growth ahead. Favourable industry trends for both operations coupled with expectations for lower global wheat prices this year bode well for the group. 

Initiate with BUY; S$1.27 TP 

  • QAF is currently trading at 10.6x FY15/16F, below its peers’ averages for both consumer goods (22x-26x) as well as integrated food producers (12x-18x). 
  • In addition to the above, the stock has been offering a stable dividend payout of S$0.05/share since FY11, which gives a dividend yield of ~5%. We think this inexpensive stock deserves more attention. 
  • Using sum-of-the-parts methodology, we have derived a TP of S$1.27, implying a total return potential of 36%. Initiate coverage with BUY.

Jodie Foo OCBC Securities | 2015-09-18
OCBC Securities Analyst Report BUY Initiate BUY 1.27 Same 1.27