On 10 Nov 2017, announced a 60% drop in net profit for 3Q17 compared to 2Q17. The main cause of drop was due to "lower selling prices experienced by Rivalea led to a significant drop in its Profit
Before Taxation (“PBT”) from $10.0 million in 3Q 2016 to $0.7 million in 3Q 2017, and is the main reason for
the Group’s reduced profitability for 3Q 2017 compared against 3Q 2016".
So a quick search on Google lead me to Australian Pork Limited that said "Pig prices peaked in 2016 at an average of around $3.75 per kilogram carcase weight equivalent.
From Christmas of that year, prices started to drop steeply and deeply. This caught industry by
surprise as no one had predicted – through the data that was available – that this was going to
occur. Average pig prices at the time of writing are signi cantly below $3.00 per kilogram and
in many cases, producers are being asked by the market to part with their pigs at below cost of
production."
So while Rivalea is still making some profits, will it at some point be forced to run the Primary Production Business at a loss?
QAF's profit after taxation for 3Q17 $7,539,000 vs 2Q16 $19,075,000. So other than the loss of $9.3 million in profit from Rivalea, there is also higher advertising and staff costs for the bakery business. Total expenses went up from $192 million to $204 million. EPS also dropped from 3.4cents to 1.3cents.
If pork prices remain under pressure, we could expect to see EPS of 1.3cents for a few quarters until the small pork producers get squeezed out of the market. Although the problem seems to be competition from imported pork. So unless Rivalea could figure a new way to increase sales of fresh pork over imported cook pork, the road could remain bumpy ahead. This is as compared to just a case of oversupply from too many pig farmers in Australia. In the later case, when the small supplier get squeezed out, supply will reduce to potentially restore the demand-supply imbalance.
And in this case, if we are looking at the worst case of EPS of 1.3cents per quarter. Baring any further loss in Rivalea, we are looking EPS of 5.2 (1.3x4) cents per year. Noting that this 1.3 cents already include the portion of profit from their 50% stake in KLGB (malaysia gardenia which they had to sell 50% stake). Taking PE of 14x, we get 72.8 cents. In the more pessimistic view, with a PE of 11x, we will get 57.2cents.
Based on the figures in 2016, the Rivalea primary production business contribute to almost 50% of QAF's overall profit. Given EPS in 2016 was around 11cents (excluding exceptional items from sale of GBKL), if Rivalea continues as it does now, EPS is likely to fall to 5.5cents. This somewhat confirms the above estimation of 5.2 cents.
So numbers will only improve if the pork prices recover or QAF does exceptionally well in their bread business in Australia, Philippines and China.
Currently QAF pays a dividend of 5cents. If earnings really fall to 5.2 cents a year, it is likely that QAF would have to cut their dividends, although they have sufficient cushion from the divestment of KLGB which they did not declare any special dividends. They currently have a cash balance of $125.8 million and they have net debt of -$28million (as of June 2017). Which means they have more money than debt. Which is good. So it is possible that QAF may attempt to keep their dividend for a couple of years until they could turn around the Rivalea business.
At 565,333,000 outstanding shares, we are looking at a payout of approx. $28.3million for dividends. So the 5cents dividend is highly likely to be sustainable for at least 1-2 years. But what if prices really fall to 70cents? It would take many years of dividend to make up for the capital loss.
I will be keeping an eye out for the pork prices in Australia, it will be good news if there is some upturn and I will revalue QAF accordingly.
So while Rivalea is still making some profits, will it at some point be forced to run the Primary Production Business at a loss?
QAF's profit after taxation for 3Q17 $7,539,000 vs 2Q16 $19,075,000. So other than the loss of $9.3 million in profit from Rivalea, there is also higher advertising and staff costs for the bakery business. Total expenses went up from $192 million to $204 million. EPS also dropped from 3.4cents to 1.3cents.
If pork prices remain under pressure, we could expect to see EPS of 1.3cents for a few quarters until the small pork producers get squeezed out of the market. Although the problem seems to be competition from imported pork. So unless Rivalea could figure a new way to increase sales of fresh pork over imported cook pork, the road could remain bumpy ahead. This is as compared to just a case of oversupply from too many pig farmers in Australia. In the later case, when the small supplier get squeezed out, supply will reduce to potentially restore the demand-supply imbalance.
And in this case, if we are looking at the worst case of EPS of 1.3cents per quarter. Baring any further loss in Rivalea, we are looking EPS of 5.2 (1.3x4) cents per year. Noting that this 1.3 cents already include the portion of profit from their 50% stake in KLGB (malaysia gardenia which they had to sell 50% stake). Taking PE of 14x, we get 72.8 cents. In the more pessimistic view, with a PE of 11x, we will get 57.2cents.
Based on the figures in 2016, the Rivalea primary production business contribute to almost 50% of QAF's overall profit. Given EPS in 2016 was around 11cents (excluding exceptional items from sale of GBKL), if Rivalea continues as it does now, EPS is likely to fall to 5.5cents. This somewhat confirms the above estimation of 5.2 cents.
So numbers will only improve if the pork prices recover or QAF does exceptionally well in their bread business in Australia, Philippines and China.
Currently QAF pays a dividend of 5cents. If earnings really fall to 5.2 cents a year, it is likely that QAF would have to cut their dividends, although they have sufficient cushion from the divestment of KLGB which they did not declare any special dividends. They currently have a cash balance of $125.8 million and they have net debt of -$28million (as of June 2017). Which means they have more money than debt. Which is good. So it is possible that QAF may attempt to keep their dividend for a couple of years until they could turn around the Rivalea business.
At 565,333,000 outstanding shares, we are looking at a payout of approx. $28.3million for dividends. So the 5cents dividend is highly likely to be sustainable for at least 1-2 years. But what if prices really fall to 70cents? It would take many years of dividend to make up for the capital loss.
I will be keeping an eye out for the pork prices in Australia, it will be good news if there is some upturn and I will revalue QAF accordingly.
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