QAF Limited conducted its annual general meeting (AGM) at Parkroyal on Pickering on 24 April 2017. Since Heartland Boy has always believed that meeting management would sharpen his investment thesis, he tried his best to avail himself that day. Furthermore, QAF Ltd is a stock that takes up a substantial portion in his investment portfolio. Fortunately, some combination of good fortune allowed Heartland Boy to attend the AGM. Firstly, that day was a public holiday in Indonesia and hence Heartland Boy need not work. More importantly, Standard Chartered approved him as one of the few registered proxies of the custodian account. Here is a review of what trended at QAF Limited AGM 2016.
1. A Challenging Operating Environment
In summary, the clarion message sent out by Mr Goh Kian Hwee, Joint Managing Director, was that the operating environment ahead will be extremely challenging. For the primary production, he mentioned that regulatory checks are getting more stringent. In addition, Mr Goh also cited a possible oversupply of pork in the Australian market at this moment. Simple economics would tell us that an oversupply will lead to a decrease in average selling prices.
Meanwhile, the company has completely written off its bakery investment in Fujian, China. It had expected to break even in 3 to 5 years but this is now unlikely owing to higher cost than forecasted. At the end of 2017, it will decide if it is sustainable to continue its operations in China.
In addition, Management admitted that the reduction in royalty fee from Gardenia KL will definitely have an impact on its bottom line. It hopes to overcome this by selling more quantities of bread, hardly convincing in Heartland Boy’s opinion.
2. Tax Issues Abound In Philippines and Australia
Heartland Boy took to the mike and asked the Board 2 questions:
- Whether it was confident of disputing the alleged income tax deficiency of $24 mil in Philippines
- A before and after scenario analysis of the net margins of the Primary Production business on the possible implementation of the 30% corporate income tax in Australia
For (i), Management sounded very confident of repelling such tax allegations from the authorities. From Heartland Boy’s personal experience working in Indonesia, he agrees with them that such issues are very common in developing countries. However, for (ii), the Management bit around the bush without giving a very concise answer. Management mentioned that after consultation with external tax advisors, they are capable of rendering the cash tax to be negligible. The question on profit margins was therefore not addressed at QAF Limited AGM 2016.
3.Shareholders Repeatedly Clamoured For Increase In Dividends
There were at least 2 shareholders who questioned why the Board of Directors did not increase the dividends for 2016. They cited that profits had more than doubled in 2016. Therefore, it would be appropriate for a special dividend to be paid out of the proceeds arising from the sale of shares in Gardenia KL. Much to the bemusement of the crowd, one shareholder even commented that because it is a special dividend, shareholders will not complain if it is subsequently absent in the next financial year! Managing Director Goh certainly saw the funny side of it and joked that his team had anticipated this question. The reasons for not increasing dividends were:
- Significant capital expenditure will be spent this year to support new factories in Philippines and Malaysia.
- His team is relatively new since they only took over the reins on 1 January 2017. His team would need more time to study the cashflow needs.
- Most of the doubling of profits was accounting gains; a one-off gain in book value arising from the higher valuation of its shares in Gardenia KL.
4. Future Catalysts Are In The Near Horizon
While the operating environment was painted as tough, Heartland Boy could infer that future catalysts are in the near horizon.
- Strategic Review of Primary Production
Owing to the excellent performance of the Primary Production division, Management is conducting a strategic review of this segment. Management is confident that any strategic review will result in enhancement of shareholder value and an announcement will be made in due course. This was repeated at least twice.
- New Production Plants in Philippines and Malaysia
The factory in Johor that is being built will have expanded capacity. It will serve the Singapore market and eventually replace the existing factory in Singapore when its lease expires. Once that materializes, QAF Limited will benefit from a reduction in operating cost. QAF Ltd has also purchased a vacant piece of land that is adjacent to its current factory in Selangor to construct a new production facility. It is looking to team up with its joint venture partner to export packaged bread to Islamic countries in Asia.
- QAF Limited Is Looking To Expand In ASEAN
Management is not deterred by its failure in China. It will continue to look at ASEAN to support its growth. Because of the consumer group in Indonesia, it will be foolish not to study that market in detail. Mr Goh revealed that the previous owner still holds the Gardenia trademark in Indonesia and East Malaysia. Again, Mr Goh hinted that this is “work in progress” and that an announcement will be made in due course.
Conclusion of QAF Limited AGM Review 2016
After the meeting agenda was completed, Heartland Boy did not see a very rosy outlook in the immediate future. Perhaps, the new Management was trying to manage expectations. However, Heartland Boy will hold on to his shares because he believes that the strategic review of the primary production division will materialize. If it happens, all shareholders will huat.
First vested in May 2016. Heartland Boy’s average QAF share price is now $1.27.
This article was published on 28 April 2017.