By Adam Wong

Investors may know that QAF Limited (SGX: Q01) is the maker of Gardenia bread – a household brand familiar with many Singaporean households. But some may not realise that QAF is also one of Australia’s largest producers of pork.

QAF’s primary production business in Australia accounts for approximately 17% of the country’s pork production. In 2016, it generated a revenue of S$395.4 million, contributing 44.5% of QAF’s total revenue.

Recently, QAF announced plans to list up to 49% of its primary production business on the Australian Securities Exchange (ASX) for approximately S$88.8 million.

I attended the QAF EGM last week to understand the management’s rationale for the proposed listing and its potential impact on shareholders.

1. QAF’s earnings per share will drop from 21.4 cents to 16.6 cents illustratively if the proposed listing goes through.

A shareholder was concerned about the lost income and asked how the management plans to replace it. Managing director Goh Kian Hwee replied that the illustration assumes a public flotation of 49% but there is no certainty that will happen.

If the demand isn’t there for the IPO, QAF may have to scale down the size of the proposed listing to between a 20% and 49% equity stake.

ASX rules require at least 20% in free float. At the same time, QAF has the intention to continue growing its bakery business to grow its earnings.

2. The management said that part of the IPO proceeds will be used to repay loans.

But they haven’t yet decided how to reinvest the IPO proceeds or whether a portion will be paid out to shareholders. The picture will become clearer when they know how much of the business will list.

3. The management believes the proposed listing will improve QAF’s valuation.

Independent director Dawn Lum explained that QAF’s bakery and pork production are two different businesses and separating them will make it easier for the market to value QAF.

Mr Goh added the listing will provide more transparency for valuing QAF’s businesses and avoid a potential conglomerate discount to QAF shares.

4. A shareholder pointed out that QAF was listing its primary production business near its book value and questioned the purpose of listing in the first place since there was no premium to the shares.

Mr Goh replied that QAF will still own 51% of the primary production business and, hence, enjoy any future upside. At this, the shareholder countered that QAF might as well keep the entire business and enjoy all the upside.

Mr Goh shared that there’s a strategic reason for the listing – one of which is to motivate the management of the primary production business to grow the business further.

5. The shareholder also asked for the management’s view on the primary production business as it hasn’t performed well over the long term.

Mr Goh agreed that the business struggled in its initial years as it is a commodity-based business. But the business has evolved and now produces higher-end products.

He highlighted that results have improved over the last three years and will, hopefully, continue to grow.

6. A shareholder questioned if this was the best time to list as pork prices have dropped 20% this year.

He proposed waiting for pork prices to recover to achieve a higher valuation for the listing.

Mr Goh explained that it takes 6-9 months to prepare for a listing on the ASX and there is no way to know which way prices will go during that time.

Rather than trying to catch the market, the management feels it is better to list now considering that the primary production business had a record year in 2016.

7. The management revealed that they explored a private placement for the primary production business.

But in the end, they decided, on balance, that it was better for the business to do an IPO.

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This article originally appeared on The Fifth Person.