March 28, 2021 - 8:01am EST by
2021 2022
Price: 0.95 EPS 0.063 0.071
Shares Out. (in M): 575 P/E 15.0 13.3
Market Cap (in $M): 547 P/FCF 0 0
Net Debt (in $M): -37 EBIT 43 0
TEV (in $M): 509 TEV/EBIT 11.0 0

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A well-run. dominant Pan-Asean short-shelf life bread franchise, with strong near-term spin-off catalyst and trades at substantial discount to smaller Asean peers



Key Investment Thesis


The key investment thesis here is a very undervalued, very steady consumer staple business with strong near-term catalyst to unlock value. QAF is a holding company with two businesses – bread business (in Singapore, Malaysia and Philippines) and Rivalea which is one of the largest integrated pork businesses in Australia. QAF has announced its plan to sell Rivalea because of the cyclical nature of the industry.  The sales process is in the advanced stage.  For conservative reasons, QAF wrote down the book value of the pork business by $28m to $132m in FY2020 (it is stated the write-down is not at Rivalea’s book-level but at the parent QAF-level, hence it isn’t an impairment of Rivalea’s business but due to revaluation).  Assuming the sale is done at $132m or $0.23 per share, the sales proceeds would be 25% of QAF market cap. Management has proposed a special dividend of 2 cents from the sales proceeds. If we exclude the sales proceeds cash of 23 cents per share, QAF’s remaining bread staple business is valued at only FY20 9.8x P/E, compared to its Asean peers like Thai President Bakery and Indosari at 18-23x P/E. The divestment of a cyclical business to focus on only its steady bread business should help to re-rate QAF. Moreover, the bread business is highly cash generative and QAF is in a net cash to equity position at 7.2% at the end of Dec 2020.  QAF has been a generous in its dividend payout historically. At current share price of $0.95, it gives a stable and attractive dividend yield of 5.3% based on FY20 dividend.


My target price at $1.40 gives the remaining bread business a valuation at FY20 19x P/E or 16x P/E (excluding the potential proceeds from the sale of Rivalea). This implies a 47% upside.

Bakery business

In FY20, the company has reclassified Rivalea to current discontinued operations. For the continuing business revenue, 33% of revenue is contributed by the Singapore bakery business, 44% by the Philippines bakery business, and 22% by the distribution and warehousing business which carries third party agency brands to gain scale economies when selling to supermarket channels. In terms of EBIT contribution, the combined Singapore and Philippines bakery businesses contributed the vast majority at 96% of operating profit in FY20. Malaysia is accounted for separately as JV income.


QAF sees strong long-term growth opportunities for its bakery business in Philippines with a population of 110m. Its remaining bakery business is in a strong position to benefit from Covid-19, in part due to its major 35% capacity expansion in the Philippines in 2018 (this accounted for 2 new plants out of 5 plants currently), and investments toward cultivating its distribution network, enabling the market-leading Gardenia brand to establish a firm foothold in new point of sales. As a result, the Philippines, which is the bakery’s key growth market, had a record revenue growth of 18.9% YoY in FY20. Margin expansion is a key profit growth driver as bakery EBIT margin almost doubled to 11.3% in FY20 from 5.9% in FY19. While both the bakery businesses in Singapore and the Philippines saw margin expansion, the Philippines bakery business had a bigger margin improvement due to a significant decline in sales return to 10-15%, from its peak at 25% when it embarked on its major capacity expansion. Gardenia Philippines has penetrated the neighborhood Sari Sari stores in the provinces with traditional trade now contributing 55% of sales from 50%; these stores do not have sales return policy (hence higher margin) and allows Gardenia to build up its brand equity by being closer to the consumer.

The achievement in the Philippines wouldn't have been possible without the investments in the past few years, particularly in distribution with a 25% increase in number of trucks and sales routes in 2019. This intensified its coverage and service, so as to relieve heavy traffic routes in Metro Manila; in Mindanao where it extended to as far as the end of the island in the Zamboanga Peninsula and Cotabato provinces; in North Luzon it extended to Kalinga and even the mountain provinces in Cagayan and adjacent rural areas. It should be noted that going forward, its Philippines market is growing capacity at a steady state of low-teens (c.10-12%) with a new line to be added next year, hence the spike in sales return cost in 2018/2019 is unlikely to repeat.

Dominant bakery companies like QAF have protection against inflation. Wheat cost which accounts for 40% of cost of goods is locked-in for at least 7 months in 2021, with further purchases made on a rolling basis. This puts it in a favorable price-to-value proposition to gain further market share, particularly in price-sensitive markets like the Philippines, where other food products particularly competing breakfast food, or smaller bakeries have no choice but to raise prices.


Malaysia’s bakery business is accounted for as a JV with QAF holding 50% interest. While JV profit is record low in the last two years due to one-off tax issues (reversal of tax incentives) and less efficient production runs, it should be noted that QAF gets a fixed royalty income of $5m pa (this is consolidated in QAF’s bakery segment), revenue continues to grow at 5%, and JV profit has likely hit bottom with no more one-offs, raw materials cost locked-in, and production runs improving.


QAF revenue by markets (S$m) FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20
Singapore 165.6 166.6 164.8 165.2 168.3 173.5 179.2 172.5 168.0 179.9 193.5
  YoY -6.9% 0.6% -1.1% 0.2% 1.9% 3.1% 3.3% -3.7% -2.6% 7.1% 7.6%
Malaysia 268.7 294.1 286.2 296.5 302.4 282.7 123.9 70.2 77.1 79.5 88.6
  YoY 12.4% 9.4% -2.7% 3.6% 2.0% -6.5% -56.2% -43.3% 9.7% 3.2% 11.5%
Philippines 87.2 102.0 108.0 114.6 120.7 140.9 160.1 171.3 183.8 208.9 248.4
  YoY 17.5% 17.0% 5.9% 6.1% 5.3% 16.8% 13.6% 7.0% 7.3% 13.7% 18.9%




Segment margin FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20
SG & PH Bakery EBIT margin 15.5% 12.7% 10.7% 10.4% 10.6% 11.6% 8.5% 6.9% 7.4% 5.9% 11.3%


Business Strengths


QAF is the dominant leader for the short shelf-life packaged bread industry in Singapore, Malaysia and the Philippines. It holds the bakery brands Gardenia and Bonjour, and commands more than 60% market share in packaged bread in each of the 3 Asean markets. In fact QAF is the only pan-Asean bakery company that enjoys economies of scale across 3 markets, its combined bakery revenue is 40% higher than either Thai President Bakery or Indosari, both market leaders in Thailand and Indonesia respectively. This allows it to achieve higher synergies in raw materials purchases, corporate and management overheads, production equipment purchase, new product development, and sales and distribution expertise.

The packaged short-life bread segment is in the sweet spot to leverage on rising consumption volume growth in Asean. Annual bread consumption volume per capita in Indonesia and the Philippines are below 4kg, the lowest in the region, followed by Malaysia at 7.6kg, Singapore and Hong Kong at 17kg, China at 7.5kg, Japan at 22.4kg and US at 40kg. Also in large population markets like Indonesia and the Philippines, the mass market packaged bread makes up only 20-30% of the bakery industry demand, while 50-60% comes from unpackaged bread made by small home producers, and the remaining 10-15% from artisan bakeries. With rising disposable income and stricter food hygiene, the small home producers are gradually losing share while the mass market packaged bread grows rapidly due to the need for convenience and consumption changes driven by middle-class families. Particularly, Filipinos have a penchant for bread culture and there is a culture of bread gifting during the Christmas season. These factors enable QAF to achieve >15% annual revenue growth in the Philippines, 5-6% growth in Malaysia and low single-digit growth for Singapore. The only exception for Philippines were those years when capacity was fully utilized. In comparison, China’s bread market continues to grow at 10-12% volume per year despite having a higher capita consumption than the Philippines, hence implying a very long growth runway for QAF’s growth market in the Philippines.

The short shelf-life packaged bread business has very high barriers to entry, hence it’s usually a winner takes all market across Asean, China, Japan, Europe and the US. This makes it an attractive consumer franchise where it is a lot more resistant to disruptions from E-commerce, new fad products or new entrants, compared to most other FMCG businesses. This explains why the packaged bread leaders like Indosari and Thai President Bakery trade at 18-23x P/E, while the Chinese leader Toly Bread trades at 35-40x P/E. These barriers to entry stem from the high requirements for distribution efficiency, deep local market knowledge, highly efficient local manufacturing plants and a strong sales and marketing team in each region of a big market. Short shelf-life bread has a product expiry of only 5 days, hence it must be efficiently transported from a factory to a central distribution centre and be placed on retail shelves within a day, with only 4 remaining days to be sold. Failure to do so will result in high product returns which will cause bakery companies to incur high losses.


As a rule of thumb, the dominant Asean bakery companies have a sales return of 10-15%, anything above 20-25% is likely to result in high losses that may exceed even the total revenue, as evident in Indosari’s losses in its Philippines expansion. Importantly, after 5 years trying to penetrate the Philippines market, Indosari has finally thrown in the towel with plans to cease its Philippines business in 2021/2022. Bread plants must be located ideally within 400km radius to its point of sales, the bakery must have sufficient bargaining power to secure prominent bread shelf space in front of stores and have excellent in-house distribution teams to make sure bread products are shelved promptly and expired products are taken off the shelves. More observant investors would know that in a typical minimart or mom-and-pop store, bread products are self-stocked by the bakery companies’ staff rather than by the retail staff which is done for most other FMCG products; there is also strict adherence to stock taking and point-of-sales data collection by these in-house bakery staff, and products are restocked at least twice a week.


Consumer habits are also known to be very sticky in short-life packaged bread. The number of SKUs (stock keeping units) of the dominant players such as China’s Toly Bread are only around 30 (vs. other major food product categories such as biscuits, chocolates and ready-to-drink tea which can number >100-300). While fad products/flavors may excite the market once in-awhile, new products typically contribute only 5% to revenue, and the bakery company has to adjust for SKU rationalization accurately each year to keep its product range highly focused. This is partly due to the need for efficient distribution, and also because the nascent Asian packaged bread industry is still in the phase of educating consumer awareness, hence it’s far more important to develop top-of-the-mind key products, and a trusted and fresh brand image. There are examples to illustrate the contrary; Indosari in 2018 tried to double its SKUs from 40 to 100 to aggressively fend off competition from new entrant Yamazaki, which resulted in sales return spiking above 20% from tail-end products, which Indosari later halved its SKUs. In China, Toly Bread’s competitor Dali Foods tried to double its SKUs to 60 vs Toly Bread at 30, Dali’s sales returns at >15% are more than double of Toly Bread’s sales return at 7%.

On the other hand, there are also opportunities for the dominant bread leader to expand the target market by broadening its product portfolio carefully, after it has established a strong distribution system which can quickly introduce new products and promptly correct excess stock levels. In Singapore, it is premiumizing its product portfolio with greater focus on new variants like the Purple Wheat Grain Loaf which has an antioxidant from purple wheat, wholemeal loaf fortified with a special strain of probiotic bacteria from Japan that is stable even during the baking process, sourdough bread, and particularly its cream bun products which are gaining share from Sunshine Bread - its nearest competitor, by taking advantage of the latter’s slow sales during Covid. In the Philippines, the focus in the past few years to develop its sandwich bread products to counter Indosari’s strength in these products should also bode well, when out-of-home consumption demand returns as Covid restrictions are lifted.    

Key risks


Potential delay in sale of Rivalea is quite unlikely as it’s now classified as a current discontinued business operation (timeframe within 1 year). Surging commodity costs may impact raw materials and logistics cost, though it has the bargaining power to lock in wheat cost. Future fluctuations in sales return cost is a risk, though QAF has now established a stronger capillary distribution penetration and its measured expansion plans going forward should help to mitigate the risk.



I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise do not hold a material investment in the issuer's securities.


Spin-off of cyclical pork business in Australia to focus on its steady short-shelf life bread business, which may lead to significant re-rating to its Asean peers level. Special dividend from the sale proceeds. 

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