10 things I learned from the 2019 QAF AGM

QAF Limited is a food company with core businesses in bakery, primary (pork) production, and distribution and warehousing. The company is the maker of Gardenia Bread – the number one selling bread brand in Singapore, Malaysia, and the Philippines.

As successful as QAF’s bakery segment is, its pork production business has been beset with challenges and a drop in global pork prices. I last attended QAF’s AGM in 2017 when the company had plans to list its pork business on the Australian stock exchange, which was subsequently shelved due to the headwinds in the industry that followed.

As pork prices fell over the last two years, so has QAF’s share price:

Chart: Google

From a peak of S$1.57 in February 2017, it fell to eventually hit a low of 56 cents over the next 20 months – a drop of 64%. QAF’s share price has rebounded strongly since the new year, but it’s still a long way off for shareholders who got in near its peak.

I decided to attend this year’s AGM to re-evaluate QAF’s recent performance and find out if its business – especially its pork production segment — was starting to turn around.

Here are 10 things I learned from the 2019 QAF AGM:

1. Revenue remained roughly flat at S$814.9 million in 2018, down 1% from S$825.8 million in 2017. EBITBA, however, fell 33% year-on-year to S$50.0 million, from S$74.4 million in 2017. This was mainly due to a 95% drop in EBITDA in QAF’s pork production segment.

Source: QAF 2019 AGM presentation

The low profitability was primarily due to two factors: falling pork prices and rising feed costs. Joint managing director Goh Kian Hwee said that the farms have to carry on feeding the pigs regardless, and the falling pork prices and rising feed costs combined were a double whammy for the bottom line.

2. QAF declared a total dividend per share of 5 cents, which the company has maintained since 2011. The dividend was despite a earnings per share (EPS) of only 1.4 cents in 2018. To preempt any questions on this point, finance director Tan Teck Huat highlighted that QAF’s four-year average EPS excluding exceptional items was 6.9 cents which meant that the company had enough retained profit over the years to maintain its dividend. Based on its 2018 dividend and a share price of 75 cents (as at 10 May 2019), QAF’s dividend yield is 6.7%.

Source: QAF 2019 AGM presentation

3. Goh believes pork prices have bottomed and expects prices to recover. The pork business is a cyclical one as it deals with a commodity whose prices are subject to market conditions. QAF also has to source for pig feed from within Australia as the country has very strict biosecurity laws and generally does not allow the import of grains. However, Australia also has extreme weather and a bad drought — that’s still ongoing — caused feed prices to jump significantly. He reassured shareholders that the pork business is doing ‘relatively well compared to others’ as some producers have had to cull their herds or exit the business entirely due to the low prices. This has led to an undersupply in the market now and Goh believes that pork prices have started to recover. He added that they’re not out of the woods yet and feed prices are still high, but things should improve moving forward.

4. A shareholder asked if the management ever considered hedging against pork prices. Goh replied that hedging cuts both ways. For example, some airlines hedge their fuel costs but lost a lot of money when fuel prices crashed during the oil crisis in 2015.

5. A shareholder wanted to know why the management was persisting with the pork production as it’s a volatile, low-margin business and not simply focus on the bakery segment which generates stable cash flows and higher margins. Goh believes that there’s still potential in the pork business to expand downstream. Its branded product sales – which offer higher and more stable margins — now account for 22% of the segment’s revenue and will help reduce volatility. He added that the management would focus on growing the business and strengthening its foundations before considering a sale.

6. The same shareholder then asked about QAF’s ‘strange’ compensation structure where one joint managing director, Goh, is paid S$2-3 million annually, while the other joint managing director, Lin Kejian, receives nothing. Chairman Didi Dawis explained that Lin is a substantial shareholder of the company (48.05% shareholding) and elected not to receive any compensation as he already earns a return through his stake in the company. Lin is currently being groomed for succession as a joint managing director with Goh.

7. A couple of shareholders asked if QAF had considered exporting pork to China. Goh said that China currently doesn’t allow import of pork from Australia and, even if it did, it would be impossible to meet their demand. China consumes 400-500 million pigs a year, while Australia as a whole only produces 5 million pigs annually. It makes more sense for the company to expand downstream and export its products to smaller markets like Singapore, Hong Kong, and Japan. He added that because of Australia’s tough biosecurity laws, Australian pork is considered more premium in terms of quality and hygiene.

8. A shareholder and shop-owner that’s been selling Gardenia Bread for 35 years voiced his frustration that the popular breads he wants is not being delivered to him. Instead, he’s forced to accept breads that his shop is slow to sell, even though he’s given feedback to the salesperson and supervisor on this issue multiple times. Goh explained that Gardenia has 72 kinds of bread and it’s not always easy selecting the right kinds and quantity of bread to supply a shop. The COO added that QAF introduced new AI software last October that studies past sales data to better match demand and supply among outlets. In response, the frustrated shop-owner said that the software should be a pull instead of a push system and deliver what the shop-owners want instead of pushing what it thinks the shop should sell.

9. Another shareholder chimed in to say that the shop-owner’s feedback is important and reminded the management that the business of fresh bread requires good distribution. He shared that he used to be in the newspaper industry and any feedback that newspapers were not being delivered on time was taken very seriously — to the point where a ‘special task force’ would be deployed just to deliver it. The shop-owner isn’t interested in whether the new software employs AI or whatnot; as long as he doesn’t receive the bread he wants, he’s not happy. He said QAF’s standard response should always be to apologise and deliver the bread a customer wants straightaway. He reminded the management that if distribution isn’t fixed, the shop-owner can always choose to go to another supplier. Similarly, if he shopped at grocery store and Gardenia wasn’t available, he would simply choose another brand. Goh acknowledged his comments and said that the COO would be engaging with the shop-owner directly.

10. A shareholder asked if Gardenia required 72 different kinds of bread and whether it would be more efficient to only focus on the bestselling ones. Goh explained that Singapore is a mature market and QAF can’t compete on volume based on just white bread alone for example. Therefore, Gardenia’s wide range of breads is a deliberate strategy as it not only competes with various players like Sunshine but also with artisanal bakeries. He agreed that producing more kinds of bread is operationally less efficient, but it’s a cost that the company is prepared to bear. QAF’s strategy is different in Malaysia and the Philippines where the company focuses more on volume as customers there are more cost-conscious.

This article is written in support of the SIAS Q&A on Annual Reports initiative to raise the standards of AGMs, and encourage minority shareholders to ask questions, engage, and interact with the management of listed companies. Founded in 1999, SIAS is a registered charity, Institution of Public Character, and industry watchdog that aims to promote exemplary standards of corporate governance among Singapore-listed companies to ensure that investor rights and interests are protected.

Adam Wong

Adam Wong is the editor-in-chief of The Fifth Person and author of the national bestseller Lucky Bastard! which made the Sunday Times Top 10 Bestseller's List in 2009 and Value Investing Made Easy which made the Kinokuniya Business Bestseller's List in 2013. In 2010, he appeared on U.S. national television on the morning show The Balancing Act. An avid investor himself, Adam shares his personal thoughts and opinions as he journals his investing journey online.

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