QAF Limited’s Latest Earnings: An Overview Of The Bakery Business
In late February, QAF Limited (SGX: Q01) released its 2017 full year earnings.
As a quick introduction, the company is involved in a number of different businesses, ranging from bakery operations to pork production, food processing and distribution to feed milling, and food trading, distribution, and manufacturing to wine distribution. On top of these, QAF also owns warehouses which it leases out. Some of the familiar consumer food brands that the company has in its portfolio are Gardenia, Cowhead, and Farmland
QAF organises all its different businesses into four main segments, namely, Bakery, Primary Production, Trading, and Logistics.
Given that the company has four different businesses, I thought it would be useful to have a look at the performance of the individual segments. In this article, I will be running through the Bakery segment.
What the Bakery segment does
The bakery segment is involved with the production and distribution of bakery products (under brands such as Gardenia). It operates mainly in Singapore, Malaysia, the Philippines and Australia. In 2017, the segment accounted for 40.1% of QAF’s overall revenue, and 52.7% of EBIT (earnings before interest and taxes).
The financial performance
The table below shows a condensed income statement for the Bakery segment for 2017:
Source: QAF 2017 full year earnings update
We can see that the Bakery segment did not have a good year in 2017. Its revenue declined by 10% during the year, and this led to its EBIT falling by 28%.
The segment’s lower revenue was caused by the deconsolidation of QAF’s bakery business in Malaysia; QAF had to sell part of its stake in its Malaysia bakery business to comply with regulations. If the effects of the deconsolidation were adjusted for, the Bakery segment would have seen its revenue in 2017 grow by 4% compared to 2016.
Improvements in revenue from the Bakery segment’s remaining business were driven by the successful launch of new products and increased market penetration in the Philippines. In Australia, the segment also benefited from “better market reach.”
Coming to the lower EBIT, it was mainly due to the deconsolidation mentioned earlier. Excluding the impacts of the deconsolidation, the Bakery segment’s EBIT would have declined by just 4% in 2017 compared to 2016. Higher advertising and promotion costs to fend off competition in the Philippines contributed to the 4% decline in EBIT. Another culprit was cessation costs related to the closing of the segment’s money-losing business in China.
What lies ahead
QAF expects to spend S$116 million on its expansion plans in 2018, up from S$67 million in 2017. The company intends to use the capital to develop plants in Malaysia and the Philippines. The investment will increase QAF’s food production capacity to meet market demand in the two countries, and allow the company to enjoy better economies of scale. Also, QAF expects to spend more on advertising and promotion to defend, if not increase, its market share.