Monday, 27 February 2017

QAF - What's with the heavy sell down?

QAF reported earnings on 24th February (Friday) after office hours. When market opened today, QAF suffered a heavy sell down from $1.53 to a low of $1.375. before recovering slightly to close at $1.415.

Summarised Results:

Full Year Revenue declined 11%
Profit after tax gain 113%, due to exceptional item
Earnings per share excluding exceptional items: 10.9 cents vs 9.4 cents
Earnings per share including exceptional items: 21.4 cents vs 9.4 cents
NAV Group 93.8 cents versus 76.1 cents
Proposed final dividends of 4 cents per share, totalling 5 cents per share for the year. (unchanged)

Exceptional items:
"Group 'Exceptional Items' relate to the Group's sale of its 20% shareholding interest in Gardennia Bakeries (KL) Sdn Bhd ('GBKL') which was completed and announced by the Group on 6 April 2-16. The purpose of the sale of the 2-% shareholding interest was to comply with the Malaysian governmental regulatory condition imposed on GBKL's manufacturing license. Accordingly, GBKL has ceased to be a subsidiary of the Group and has become a Joint Venture of the Group."

According to Investopedia:
A joint venture (JV) is a business arrangement in which two or more parties agree to pool their resources for the purpose of accomplishing a specific task. The task can be a new project or any other business activity. 
A subsidiary is a company with voting stock that is more than 50% controlled by another company, usually referred to as the parent company or the holding company. A subsidiary is partly or completely owned by the parent company, which holds a controlling interest in the subsidiary company. In cases where a parent company owns a foreign subsidiary, the subsidiary must follow the laws of the country where it is incorporated and operates, and the parent company carries the foreign subsidiary's financials on its consolidated financial statements. 
Exceptional item recognition:
"Previously, the Group has recognised an exceptional gain of $9.7 million as a result of the sale of its 20% shareholding in GBKL, as announced in the Group's financial results for the second Quarter ended 30 June 2016 on 12 August 2016. Subsequently, in compliance with Singapore Financial Reporting Standards, the Group, with assistance of external independent advisors, carried out an exercise to determine the fair values of the Group's remaining 50% stake in GBKL's identifiable assets and liabilities. 
As a result, a net exceptional gain of $59.4 million arising from the sale of 20% stake in GBKL and the remeasurement of the remaining 50% stake in GBKL has been recognised during the year" 
Analysis of Statement of Cash Flow (I may be wrong on this)
Cash flow from operating activities
Profit before Tax: $130,615,000 (Inclusive of $59.4m gain from sale of GBKL)
Gain on dilution of interest in a subsidiary company: ($59,375,000)
Essentially, Cash flow from Operating activities did not change as they cancel out each other

Cash flow from investing activities
Net cash inflow from dilution of interest in a subsidiary company (Note A): $986,000
Under Note A:
Main bulk of the cash is classified as reclassification to Joint Venture: $81,906,000
Under their Statement of financial position, non current assets, Joint Venture is recorded as $76,318,000, beefing up their assets. (I got no idea how to account for the balance $5,588,000)

Under review of the performance of the group
Other than the above mentioned deconsolidation of the financial results of GBKL, increases in sales were achieved by all business segments of the Group - Bakery, Primary Production and Trading & Logistics. 
Despite the deconsolidation of the financial results of GBKL and the resulting declassification and exclusion of GBKL's operating profits from the Group's consolidated operating profits from April 2016 onwards, the Group still achieved an increase in Profit Before Taxation of 90% to $130,8 million in FY 2016 from $68.8million in FY 2015. Excluding the one-off Exceptional Items of $59.4 million, Group PBT of $71.2 million increased by 4% and this increase is mainly attributable to the increased profitability in Rivalea. Rivalea achieved increases in profitability through higher average selling prices from a better product mix, increased sales volumes, productivity gains, increased meat processing activities and lower operating costs, in particular, lower feed costs. 
Essentially, it seemed to me that the reason for the sell down is due to investors expecting more from QAF's performance. Share prices had increased by 50% from the $1 range one year ago to $1.50 range but earnings excluding exceptional items did not reflect the share price surge hence there is a correction this morning. Based on past performance as a guide for current value, QAF should trade in the range of $1.04~1.10. But considering the exposure given to QAF by many established financial bloggers, notably ASSI, value has somewhat been realised by the investing crowd over the year. Compared to other similar companies, it had been concluded that QAF is still under valued.

Either way, I took advantage of the sell down today and took up a position in QAF.

Disclaimer: I'm currently vested in QAF. The above information are based on my limited understanding and does not constitute a buy or sell call. Always do your own due diligence before taking any actions.


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