Three-A Resources — Moving towards structural growth inflexion point

Three-A Resources — Moving towards structural growth inflexion point
Tags: AmResearch Sdn Bhd | Brokers Call | Three-A Resources Bhd

Written by Financial Daily
Tuesday, 22 June 2010 10:56

Three-A Resources Bhd
(June 21, RM1.87)
Upgrade to “buy” from “hold” at RM1.83 with fair value of RM2.21 (from RM2.12): We are upgrading Three-A Resources (3A) from “hold” to “buy”, and raising our fair value from RM2.12 per share to RM2.21 per share based on unchanged PER of 24 times FY11F earnings or at 15% discount to the average PERs of relative consumer stocks in China (28 times PER).

We raise our earnings estimates by 4% to 5% to reflect higher profit accretion from the recent formalisation of its China joint venture with Wilmar International. We now expect 3A to deliver earnings of RM34 million in FY11F and rising to RM40 million in FY12F from just RM22 million in FY10F.

The JV’s “blueprint” plant, which forms part of a broader plan to invest up to US$40 million (RM127.27 million) in F&B ingredients production in China, will have higher-than-expected production capacity of 50,000 tonne/month. When commissioned in mid-FY11F, the US$7 million maiden plant would boost the group’s overall production capacity by an estimated 67% to 80,000 tonne/month.

Payback period is a short 18 months. The “blueprint” plant is strategically located with close proximity to a cluster of Wilmar manufacturing hubs at Qinhuangdao seaport in China, giving rise to immense logistical synergies and distribution strength for 3A.

Beyond this maiden plant, a multiple plant expansion strategy is in the pipeline to leverage on Wilmar’s extensive presence in China where it has at least 60 plants and a wide distribution network.



In our earnings model, we have only assumed contributions from just the maiden Chinese plant and only three product lines, versus six in its Malaysian plant. Hence, there may be further upside to our earnings estimates when 3A accelerates its Chinese plant expansion or broadens its product lines. Such a move appears likely.

Locally, expansion plans are on track to alleviate supply constraints due to lack of production capacity. With glucose and maltodextrin production currently operating at maximum threshold, earnings are set to get a boost from enlarged capacity of new glucose (+62% to 13,000 tonnes/month) and maltodextrin plants (+166% to 3,200 tonnes/month) by end-2010.

Net gearing is a healthy 20% for FY10F. Assuming the group gears up for more plants in the pipeline, net gearing is still a comfortable 40%. And, we are not unduly worried because of the short payback and the infrastructure advantages from its tie up with Wilmar.

At forward PER of 20 times currently, the valuation is not expensive given 3A’s robust capacity-driven earnings growth from geographic and product line expansion, a strong franchise in maltodextrin production and a solid “hands-on” management team. — AmResearch Sdn Bhd


This article appeared in The Edge Financial Daily, June 22, 2010.

A quick look at 3A Resources (25.5.2010)

A quick look at 3A Resources (25.5.2010)
http://spreadsheets.google.com/pub?key=t5sIgC4RjUfn6WTFOcjH0Jg&output=html

A quick look at 3A Resources (5.5.2010)

A quick look at 3A Resources (5.5.2010)
http://spreadsheets.google.com/pub?key=tcpHxcoccuKHRFO8To1fewQ&output=html

Wilmar: Asia’s next Cargill in China?

Wilmar: Asia’s next Cargill in China?


KUALA LUMPUR, May 3 — Singapore-listed Wilmar is shaping up to become the Asian version of agribusiness giant Cargill, with an expanding network of farms, food processors and shipping companies.

And it’s showing its muscle where it matters most — in China.

Wilmar’s integrated China operations account for 44.7 per cent of its US$10.3 billion (RM32.79 billion) assets, allowing it to weather recent volatile food prices and now a likely yuan policy change.

The company had the most to gain when Beijing in April slapped import curbs on Argentine soyoil — a commodity that competes with Wilmar’s domestically crushed oilseeds in China and imported palm oil.

This resilience has spurred investors to clamour for Wilmar to revisit a shelved IPO for its China business, possibly this year, four years after the powerful Kuok family merged Wilmar and Malaysia-based Kuok Group to create the US$32 billion firm.

“I believe they will revisit the IPO. It’s anybody’s guess when it happens, but Wilmar has rightly tapped into the fact that agriculture is super-hot in China,” said Michael Greenall, an analyst with BNP Paribas.

“With the super-charged growth in China’s economy, higher incomes and rural-to-urban migration contributing to stronger demand in all the sectors it’s invested in, Wilmar will act.”

Wilmar’s proposed China listing would have raised as much as US$3.5 billion on the Hong Kong stock exchange, at the lower end of the range of China-based food companies.

Wilmar, which has been dubbed by analysts as the “China proxy”, currently trades at 18 times its 2010 earnings, richer than rival China Agri Industries’ 14 times but cheaper than 22 times at China Foods.

Wilmar’s shares have gained more than 8 per cent this year, outperforming a 2.5 per cent rise on Singapore’s benchmark index, while other plantation firms such as Malaysia’s Sime Darby, IOI Group and Indonesia’s Astra Agro Lestari are trading lower.

Margins in Wilmar’s main business sectors — oilseeds and grains, palm and laurics and consumer food products — certainly have room to grow as the world’s most populous country and third-largest economy keeps to its target of 8 per cent annual growth.

YUAN BOOST?

An immediate margin boost may come from a yuan policy shift that could make imported soybeans cheaper for Wilmar — a top importer that dominates a fifth of China’s 94 million tonnes of soy processing capacity.

It also buffers Wilmar from negative margins arising from weak livestock feed demand for soymeal, as the food processor can channel soyoil into its cooking oil business that controls 45 per cent of China’s market.

In contrast, the influx of cheap soy imports may further weigh on smaller crushers that have tiny integrated downstream operations. Some have none to speak of.

Soyoil accounts for a quarter of China’s 6.4 million tonnes of edible oil imports, and Wilmar makes up the rest with palm oil from its estates in Southeast Asia, taking a larger market share than Sime and IOI.

Analysts say a Wilmar IPO will bring all these factors into play.


“Wilmar is one of its kind. They are not only selling to China but they also know the supply side (because) they have estates in Malaysian and Indonesia,” said Ivy Ng, an analyst with Malaysia’s CIMB Investment Bank.

“If you look at China Agri, they don’t have any estates, they buy palm, process and sell.”

Wilmar’s plantation landbank of 570,000 hectares is just 41 per cent planted, and analysts say the planting will rise in tandem with China’s growing appetite for edible oils and palm oil getting cheaper if Beijing lets its currency appreciate.

The scale of its operations — 130 processors and plants in China — allows Wilmar to manage the fluctuations in soybeans and palm oil and preserve earnings.

A 10 per cent change in the price of palm oil only affects the company’s 2010 earnings by 2 per cent, Goldman Sachs said in a note. Other analysts say such a swing affects earnings of purer plantation plays such as Astra Agro Lestari by 13 per cent.

TURNING TO RICE AND WHEAT

The major risk to Wilmar’s growth is that it will eventually come up against regulations stipulating that foreign firms cannot own new soy processors and those with a soy market share of more than 15 per cent will not get approval to expand capacity.

But analysts are still pricing in an upside to Wilmar’s share price, which surged 130 per cent in 2009. The Thomson Reuters I/B/E/S survey of 19 analysts has an average target price for Wilmar of S$7.80 (RM18.13) — a 13 per cent gain from its current level.

Much of the optimism lies with Wilmar’s aggressive move into China’s highly fragmented rice and wheat milling sectors, which are the world’s largest, and also produce noodles and pastries.

“They have been investing a lot in rice and flour in China, which can become very big,” Nomura analyst Tanuj Shori said.

“The biggest entry barrier is scale. The bigger you are, the easier it is to achieve higher profitability.”

China Agri leads with a 2 per cent market share in both sectors, but Wilmar can take top position as it can build mills at its existing manufacturing bases where it can share overheads and logistics, reducing costs and boosting margins, analysts say.

Backed by a balance sheet of US$23.5 billion, Wilmar can fund its rice and wheat expansion through its US$1 billion capex. China Agri plans to spend US$1.1 billion this year.

And Wilmar can channel wheat and rice products to its existing edible oil customers — noodle manufacturers Tingyi and Want Want.

“We believe Wilmar is capable of adding 4 million tonnes,” said Hwang-DBS analyst Ben Santoso, basing that on five 400,000 tonne capacity plants for both rice and flour.

“Compared to its last published capacity of 890,000 tonnes, it’s an extraordinary expansion.” — Reuters

3A's net profit up 85% in 4Q

3A's net profit up 85% in 4Q

Written by The Edge Financial Daily
Tuesday, 23 February 2010 23:34


KUALA LUMPUR: THREE-A RESOURCES BHD [] (3A) saw its net profit rise 85.1% in the fourth quarter (4Q) ended Dec 31, 2009 to RM4.52 million from RM2.44 million a year earlier due to better demand for its products in the food and beverage manufacturing industry and higher margins, the group said in its results announcement to Bursa Malaysia today.

Revenue rose 71.54% to RM55.2 million compared to RM32.18 million a year earlier while profit before taxation is significantly higher at RM6.5 million compared to RM234,000 a year ago. The group attributed the improvement to higher turnover and better product margin.

Basic earnings per share (EPS) were 1.32 sen from 0.79 sen previously. No dividend was declared for the quarter under review.

On a sequential basis, the group's turnover of RM55.2 million was 22.3% higher than RM45.1 million recorded in the immediate preceding quarter. However, the profit before taxation for the current quarter of RM6.5 million is lower by 8% than that recorded in the immediate preceding quarter of RM7.06 million. The group attributed this to lower products margin recorded as the costs of raw materials rose in the quarter under review.

For the 12 months ended Dec 31, 2009, net profit was RM18.04 million, up 48.6% from RM12.14 million in FY08. Revenue increased 17.3% to RM178.58 million compared to RM152.25 million a year earlier while basic EPS was 5.7 sen compared with 3.9 sen previously.

The effective tax rate for FY09 was 23.9%, which is slightly lower than the statutory income tax rate of 25% as a result of utilisation of reinvestment allowance, the group explained.

As for its prospects, 3A said its products are expected to remain competitive.

"Despite the prevailing economic conditions, the directors anticipate that the group will achieve a satisfactory performance for financial year 2010," it said.

3A's share price has more than doubled to today's close of RM2.29 since its Oct 6, 2009 closing of 89.5 sen.

http://www.theedgemalaysia.com/business-news/160229-3as-net-profit-up-85-in-4q.html

Insiders' actions in 3-A Resources

The share price of 3A rose rapidly to a high level recently.  What actions did the "smarter" insiders in 3A take?

Click here:
http://www.klse.com.my/website/bm/listed_companies/company_announcements/changes_in_s_holding/index.jsp

Type of transaction Date of change No of securities Price Transacted ($$)
Disposed 15/10/2009 2,448,002
Disposed 16/10/2009 2,300,000

3A: More details needed on potential JV

3A: More details needed on potential JV

Tags: InsiderAsia | Three-A Resources

Written by InsiderAsia
Tuesday, 20 October 2009 16:12



FOOD ingredient products manufacturer, Three-A Resources (3A, RM1.58) has hogged more than its fair share of the limelight over the past few weeks. Its share price has risen by more than five-fold in the year to date, most of its gains coming in the past month, on the back of high trading volumes.

The primarily catalyst was news that Singapore-listed Wilmar International Ltd will invest in the company via a private placement of 61.6 million shares. The shares were priced at 75 sen per share, which will raise RM46.2 million cash proceeds for 3A. Upon completion, Wilmar will hold a 16.67% equity stake in the company.

More importantly, the placement exercise is widely seen as the precursor to a closer business partnership in the future. 3A has suggested the possibility of the two companies setting up manufacturing facilities for food ingredient products in neighbouring countries, such as China.

Private placement a precursor to future JV?
Wilmar is one of the world's largest refiners and traders for crude palm oil. It is also a leading distributor of staple food, such as cooking oil, flour, rice and bottled mineral water, in China. Its extensive network, both upstream and downstream, is expected to work just as well for food ingredient products.

3A is already the leading ingredient products manufacturer in Malaysia. Its main products include caramel colour, glucose and maltose syrup as well as owning our country's only maltodextrin plant. Business has been growing at a rapid pace. The company's sales expanded at a compounded rate of 30% per annum between 2003-2008. Plans for the next few years will further underpin growth, forecast to be in the double-digit range annually.

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, 3A has established a good reputation and track record after being in the business for more than three decades.
Partnership with Wilmar will help 3A penetrate the world's most populous market more effectively and significantly expand its business operations beyond the local shore.

Devil is in the details
Nonetheless, discussions on any overseas joint ventures are believed to be in very preliminary stages. It is certainly too early to quantify future earnings stream. While Wilmar will undoubtedly give 3A a leg up in the Chinese market, we expect it will take time to convince manufacturers of end consumer products — such as soya sauce, confectionery and dairy products manufacturers — to switch from their existing supply source. Customers will require assurances on consistency of quality, production and delivery. For instance, new plants often encounter teething problems.
In other words, the process is not as simple as getting products on the shelves. In this sense, the steep rise in 3A's share price may have been a little premature.

Good longer-term growth prospects

To be sure, 3A's earnings are set to expand going forward. Its new 7,000-tonne per month glucose plant, completed in the fourth quarter of 2008 (4Q08), is registering rising utilisation. The 1,200-tonne per month maltodextrin plant is almost running at full capacity, thanks to the availability of glucose feedstock.

It is planning for a second maltodextrin plant with up to 2,000 tonnes per month capacity. 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 can easily be upgraded to produce up to 12,000 tonnes per month with the incurrence of just a small additional capex.
3A's net profit is forecast to grow by 34% to RM16.2 million this year and a further 25% to RM20.2 million in 2010. That translates into earnings per share of 4.4 sen and 5.5 sen for 2009-2010 (after adjusting for the additional shares issued).

But valuations-rich pending further information
However, following the strong price rally, the stock is now trading at a relatively rich price-to-earnings (P/E) of 36 times and 28.9 times our estimated earnings for the two years.
Our forecast has not taken into account earnings from any future partnership ventures with Wilmar, which may or may not materialise. Hence, pending more concrete details, we are inclined to downgrade our recommendation from buy to hold, at least for now.

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.


http://www.theedgemalaysia.com/business-news/151748-3a-more-details-needed-on-potential-jv.html

A boon for 3A in Wilmar

A boon for 3A in Wilmar

Tags: Fang Chew Ham | Three-A-Resources Bhd (3A) | Wilmar Intenational Ltd

Written by Cindy Yeap
Tuesday, 06 October 2009 10:46

KUALA LUMPUR: In a surprise move seen as further diversifying downstream, global PLANTATION [] player Wilmar International Ltd is set to emerge as the second-largest shareholder in food and beverage ingredients manufacturer THREE-A RESOURCES BHD [] (3A).

The exercise is the first step towards more partnerships ahead, including for potential joint overseas acquisitions, 3A, a nondescript Main Market company said in a statement to Bursa Malaysia yesterday.

Wilmar, a Singapore-listed plantation and palm oil processor, is set to pay RM46.2 million or 75 sen per share for a 16.67% stake in 3A’s enlarged share capital via a proposed private placement of up to 61.6 million shares, or 20% of its existing share base, 3A said.

“Wilmar has given a letter stating that it is interested to subscribe for 61.6 million placement shares at 75 sen per share… The proposed private placement is to enable 3A Resources and Wilmar to collectively venture into any future overseas investment,” 3A said in the statement.

The Malaysian company produces, among others, caramel colour, glucose syrup and soya protein sauce that are used in the processing of food. Its maltodextrin plant is the only one in the country and plans are underway to set up an additional plant by the end of next year, according to a note dated Aug 14 by Asia Analytica Sdn Bhd.

Maltodextrin is a white powder with little sweetness that is widely used as fillers or bulking agent.

After the completion of the placement, Wilmar, which recently delayed the listing of its Hong Kong unit, will end up as the second-largest shareholder in 3A.

The 75-sen indicative issue price represents a 12.63% discount to 3A’s five-day weighted average market price up to Oct 2 of 85.84 sen. The indicative issue price is at a 21.9% discount to 3A’s 96 sen closing price yesterday. The stock, which rose to as high as 97.5 sen intra-day yesterday, ended the day up 13.5 sen, or 16.36%, with 12.7 million shares done.

Standard & Poor’s has a hold recommendation on 3A with a 60 sen price target as at Aug 14, according to Bloomberg data.

The RM46.2 million proceeds from the private placement will be used as working capital as well as for “new overseas investment” after deducting some RM400,000 in estimated expenses, 3A said, without elaborating on the possible acquisitions abroad.

The indicative proceeds are set to boost 3A’s net asset per share to 34 sen from 26 sen as at Dec 31, 2009. The enlarged share base of 369.6 million shares (from 308 million shares currently) will also see its gearing fall to 0.36 times from 0.57 times.

The proposed private placement, which needs the approval of shareholders of the Malaysian company, is expected to be completed in the fourth quarter of 2009 and is not expected to have a material effect on earnings for the current year ending Dec 31, 2009, 3A said.

While 3A’s earnings per share (EPS) may see a corresponding reduction with the 20% larger share base, the company expects proceeds from the private placement to be used for overseas investments which are expected to contribute positively to future earnings.

Fang Chew Ham and family, currently 3A’s single largest shareholder, will see their collective shareholding diluted to 37.2% from 44.6% following the private placement. Lembaga Tabung Haji will become 3A’s third-largest shareholder with a 4.6% stake, down from 5.5% as at Sept 30, 2009.

3A has appointed OSK Investment Bank as adviser for the proposed private placement, and applications for the exercise will be submitted to the authorities within a month.

Wilmar, whose shareholders include the Kuok Group, fell six cents, or 0.98%, to S$6.05 with 6.8 million shares done yesterday. It had not made an announcement to the Singapore exchange at press time.


This article appeared in The Edge Financial Daily, October 6, 2009.