Strong results underscore 3A's resilience and growth potential

Tuesday, 25 August 2009 17:23

THREE-A Resources' (3A; 52 sen) strong earnings results for the second quarter of 2009 (2QFYDec09) highlight both, resilience in the company's underlying business as well as its growth potential.Strong 2Q09 earnings resultsTurnover was 2.4% higher year-on-year (y-o-y) but represented a strong 37% improvement from 1Q09 at RM45.2 million.

The company attributed this to improved demand for its ingredient products.Net profit increased sharply by 17.6% y-o-y and 157% quarter-on-quarter (q-o-q) to RM5.5 million in 2Q09. This latest set of results was 3A's strongest quarterly earnings since the company's listing in 2002.

Resilient demand for ingredient productsDemand for end-consumer products that use 3A's ingredients is relatively recession-proof. Sales were affected in the second half of 2008 (2H08) and 1Q09, first by the melamine scandal — which hurt consumer demand for milk products and confectionery — and then by the global credit crisis.

The latter saw many end-user companies cutting back on new purchases to run down on inventory.Restocking activities on the back of improving outlook for the global economy are believed to have helped boost 3A's sales in 2Q09.

But more importantly, the earnings results also underscored the relative demand resilience — and still vast growth potential for its ingredient products.Still vastly untapped domestic market 3A is filling orders for its newly commissioned 7,000-tonne per month glucose plant at a good pace.

The glucose plant is already running at about 40%-50% capacity, since its completion in 4Q08. The availability of additional glucose feedstock has also upped utilisation at its maltodextrin plant, which is now running at almost full capacity. Previously, limited feedstock had kept production at just about half of its 1,200 tonnes per month capacity.

The ability to ramp up utilisation fairly quickly strongly suggests that the domestic market for glucose and maltodextrin is still vastly untapped.3A is the leading producer for glucose and maltose syrup — used as sweeteners in the food industry such as confectionery, pharmaceutical, ice cream, biscuit and beverages — in the country.

The company's maltodextrin plant is the only one in Malaysia. Prior to its entry into the market — in mid-2007 — all of the maltodextrin consumed locally was imported. Proximity to end-user companies gives 3A a strong home ground advantage. Its maltodextrin is also competitively priced against those imported from the US and Europe.

Maltodextrin is a white powder with little sweetness, has a bland taste and is widely used as fillers or bulking agent.Initially, the company focused on, and has been quite successful in tapping into, the 3-in-1 dry beverage mixes market segment.

It is now turning to other segments of the maltodextrin market, such as the infant milk powder industry.In fact, following positive feedback from end-users, both local and in the region, the company is now planning to set up another maltodextrin plant capable of producing up to 2,000 tonnes per month. As a stopgap measure, 3A intends to upgrade its existing maltodextrin plant, which would boost output up to 1,500 tonnes per month, to cater to rising demand.

Having good success in exports3A ensures that all of its production processes meet the stringent quality requirements of the food industry. It has a good reputation and track record after being in the business for more than three decades.

Success in the overseas markets is another acknowledgement of the company's product quality. Its ingredient products are sold to countries such as Korea, Taiwan, Singapore, Australia and the Philippines. Exports currently account for about one-third of the company's sales. In short, its longer-term growth prospects — driven by both domestic and overseas demand — are very good.

Expansion plans to support double-digit growthWe expect the company's current expansion plans to sustain double-digit sales growth for the next three to four years. As mentioned, 3A is planning for another maltodextrin plant. If all goes to plan, the new plant will be operational by 4Q2010.

Additional feedstock requirement for the new maltodextrin plant was already taken into account when 3A was building its glucose plant last year. The glucose plant, with current capacity of 7,000 tonnes per month can easily be upgraded to produce up to 12,000 tonnes per month with the incurrence of just a small additional capital expenditure.

Looking further ahead, the company recently acquired a piece of land adjacent to its factory in Sungai Buloh, Selangor, for expansion purposes. The land could be used to ramp up its caramel production capacity within a fairly short lead time as 3A can leverage on existing support infrastructure.

Net profit estimated to grow 22% in 20093A is on track to register double-digit sales growth this year — we estimate by about 13% to RM171.6 million — commendable given the global economic downturn.

Volume sales growth for its ingredient products is expected to more than offset lower average selling prices. We estimate prices have adjusted lower by about 10%-15% from the peak in 2008, in line with lower commodity and raw material prices.

Improved utilisation and economies of scale will also boost profitability. In particular, higher sales for glucose and maltodextrin are likely to have contributed to 3A's improved margin in 2Q09. Glucose and maltodextrin are believed to be relatively higher-margin products within the company's product range, which also includes caramel colour, soy protein sauce and natural fermented vinegar.

Operating margin rose to 19.8% compared with 17.4% and 13.9% in 2Q08 and 1Q09, respectively. Net profit for the current year is estimated at RM14.8 million, up 22% y-o-y. Sales growth should pick up pace in 2010 — net profit is estimated to expand to RM17.5 million.

Attractive valuations relative to growth prospects3A is a rapidly growing consumer company. Its share price has done very well over the past few months. Nevertheless, the stock is still trading at attractive valuations relative to its growth potential.

Its shares are trading at price-to-earnings (P/E) of only 11.2 and 9.5 times our 2009-2010 estimated earnings. This is well below the average P/E for the broader market, currently estimated at 17-18 times.Plus, the stock also offers fairly decent yields. 3A paid dividends totalling one sen per share in 2008.

Assuming a similar payout level, dividends are estimated to rise to 1.2 sen per share this year, which translate into a 2.2% net yield. Going forward, we expect dividends will trend higher in line with its earnings growth. Its balance sheet, with net debt of only RM13.5 million at end-June 2009, is well able to support the company's expansion plans.

Net tangible assets stood at 27 sen per share.Note: This report is brought to you by Asia Analytica Sdn Bhd, a licensed investment adviser. Please exercise your own judgment or seek professional advice for your specific investment needs. We are not responsible for your investment decisions. Our shareholders, directors and employees may have positions in any of the stocks mentioned.