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Chui Ong asked 4 years ago

Hi Victor, Rusmin, 
Is PE the right valuation metric to use for QAF? I would like to compare QAF to its peer, but I only know of Auric Pacific, but it’s delisted so I can’t find it’s financials to compare. Do you have suggestions for other QAF’s competitors that I can look into? 
Thank you. 

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Jieren Zheng replied 4 years ago

Just sharing my thoughts, I would use PE for QAF.

Auric is delisted, the only other one I can think of are Japfa and ChinaKangdaFood but they are in the primary production business (QAF no longer purely relies on bakery giving the most amount of profits).

Chui Ong replied 4 years ago

Thanks Jieren for sharing. Seems like most F&B are valued at about 20x PE. While Auric Pacific seemed to have been privatized at about 13X PE, what PE valuation would you put for QAF? I am wondering if 15X PE seems reasonable.

Jieren Zheng replied 4 years ago

Actually, my lazy method is just to see the 5-10 years PE range and determine is it cheap or expensive. But do remember if fundamentals change, you must discount or check what is the new norm.

1 Answers
Rusmin Ang answered 4 years ago

Hi Chui, 
I would stick to simple valuation like PE or P/CF before working capital. For earnings, remove any exceptional items from your calculation. QAF recognised one time gain for their some stake disposal for Malaysia unit. Also, their earnings for 2016 include tax benefit which QAF enjoyed from substantial tax saving for their primary production business (loss-making then). This tax saving was fully utilise so we can expect higher tax for QAF in years to come.  
For the peers, you can have a look at Nippon Indosari. It is trading at high multiples of more than 20x due to its high growth. So you’d need to take into account PEG if you’re comparing bread businesses in other countries. 

Chui Ong replied 4 years ago

Thanks Rusmin. Thanks for highlighting the CAGR part. I went back to look at the EPS growth and realize that QAF actually has declining EPS since 2012. In 2012, the annual report states that there was a one-time impairment of $21M for doubtful debts until “other operating expenses”. But it seems that this $21M continue to persist in subsequent years as “other operating expenses” continue to be ~$80M instead of $55M in 2011.

year 2011 2012 2013 2014 2015 2016
EPS (excluding extraordinary items) 0.12 0.11 0.06 0.08 0.09 0.11
ave PE (year after) 6.01 8.68 16.20 13.35 12.61 12.36
Avg P/CF 3.75 7.05 6.16 7.28 7.64 7.41

Since CAGR is negative, is it still possible to PEG? How to calculate?

So if we just use PE, at $1.22, QAF would be about 11x PE. Given that Auric Pacific was privatized at about 13X PE, would 15x PE for QAF be too optimistic? That would give a target price of about $1.65.

The P/CF is around 7.41. Would it be reasonable to value at 10X P/CF, which would give a price target of about $1.80?

If we take the lower of the 2, $1.65 as the target, what should be reasonable margin of error to assume? is 30% sufficient?

Also, how would the IPO of Rivalea affect QAF?

Thank you very much!

Rusmin Ang replied 4 years ago

For PEG, you can use the historical CAGR as a start but it is not a good indication moving forward. Most importantly, we need to figure out the run way for QAF moving forward. This is one big challenge as it depends on mgt planning, execution and competitive landscape on the ground. QAF today will look cheap if the mgt can grow its business overseas down the road. Else it is fairly value from its current valuation, imo. In the past AGM, the mgt did talk about growing into other market like Indonesia but I find that it is too early to take that into consideration. So if we are looking at its historical figures, it seems that they are struggling to grow their sales. This is an indication the mgt is facing a lot challenges. Again, this is backward looking and if we can figure out its growth path, then QAF is attractive.

I think it is a good plan for QAF to list Rivalea since its earnings are hitting all time high. I don’t think the earnings are sustainable moving forward, owing the oversupply problem and removal of tax advantages.

Chui Ong replied 4 years ago

Thanks Rusmin. Hmm.. running a business really not easy.