QAF @ 50 cts - Rising tides & Acquisitions

QAF is a leading food company with history as far back as 1950's and listed in SGX in 1967. Over the years, its Gardinia and Bonjour brands of bread have established itself as the market leader in the Singapore, Malaysia and Manila Metro City.

QAF's foray into the Australian meat business in 2001 was an untimely one due to the drought conditions in the subsequent two years which led to high animal feed prices and impact its bottom line. QAF's 2003 results would have been its worst in recent years if not for its exceptional gains of $31M from the sales of its Shop & Save supermarket business.

While its bread business continues to perform relatively well, especially in Malaysia and Philippines, it's Australian meat business has been recovering since early 2004 and is expected to stage a strong turnaround in 2005. Hence, we are expected to see a good set of operating results for FY2005.

Noted that QAF has been on a spade of acquisition trails in the last two years, started off with a 100% in Bakers Maison for A$2.2M (NAT = A$2.2M, PAT A$85K, Mar04 results). It has also been accumulating shares in PSC bring it's stake up to 22.13% (as of Mar05) through open market purchases and right subscriptions from 2004 to early 2005.

In Mar05, it acquired a 100% stake in Oxdale Dairy for A$3.6M to enter the milk and diary business. With these new investments, QAF appears to be very keen in expanding its domain in Australian, possibly to use it as a primary food production base for eventual export market opportunities.

In June-Jul05, it made two acquisition in China;
(1) Shaanxi Hengxing Fruit Juice @ RMB63.75M. representing 51% interest and QAF's share of asset and PAT will be RMB81.3M & RMB16.7M respectively. QAF will extend a loan of RMB50M to this subs, which is in the apple juice concentrate market.

(2) Exercise call option for a 18.74% stake in Zhongguo Jilong of 100.46M shares @ 15.5cts/share. Although this price is at a 6% discount over the price at that time, as of 27 Oct 05, this share is traded at 10.5% (risk of investment writedown). The investee company is in the business of selling preserved food products, peanut oil and freeze dried food products.

(3) The third deal involving China Delisi was aborted.

As of Mar05, QAF has a 22.13% stake in PSC via a series of open market purchase and rights subscriptions. The company has stated that PSC is useful for its distribution network althought I don't see it as a reason strong enough to acquire this amount of stake as PSC does not have very consistent past earnings and has overly diversified into education and hotel business.

Nevertheless, the main attractive of QAF to me is still its Gardinia/ Bonjour bread business which is steady and cash generating. I made an opportunistic buy @ 49.5cts amid its pending third quarter results. I expect the full year results to be strong and the downside appears to be limited with Goi of Di Yi Jia and director Andree Halim buying on dip.