3A (0012) - Analysis of Three-A Resources Bhd




Dear Readers
Three-A Resources Bhd (“3A“) is a manufacturer of halal and kosher (Jewish) certified food and beverage ingredients such as:
  1. Caramel colour, a food colouring.
  2. Natural Fermented Vinegar such a rice and distilled vinegar.
  3. Hydrolised Vegetable Protein/Soya Protein Sauce which is pretty much soy sauce.
  4. Glucose/maltose syrup.
  5. Maltodextrin, a thickener like starch which is used in food and beverage.
3A’s main operating site is in Sungai Buloh, Selangor.
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Credit: 3A
Financials
DATA 2016 2015 2014 2013 2012
REVENUE (RM’000) 387,718 352,400 311,410 302,910 306,428
PROFIT (RM’000) 38,921 20,082 18,214 10,316 17,638
OPERATING PROFIT (RM’000) 60,493 38,636 33,768 23,113 26,563
SHAREHOLDERS’ EQUITY (RM’000) 279,435 248,171 231,825 219,031 213,754
DEBT (RM’000) 60,142 70,948 47,824 73,748 100,894
RATIO
DEBT TO EQUITY RATIO 0.21 0.28 0.21 0.34 0.47
OPERATING PROFIT MARGIN 0.15 0.11 0.11 0.07 0.09
OCF RATIO 2.33 0.14 1.64 1.11 0.03
PROFIT MARGIN 0.10 0.06 0.06 0.03 0.06
EPS (CENTS) 10.00 5.10 4.60 2.60 4.50
EPS (ADJUSTED) CENTS 7.91 4.08 3.68 2.10 3.23
DPS CENTS 1.80 1.40 1.40 1.20 1.20
DIVIDEND PAY OUT (%) 18.0 27.4 30.4 46.1 26.7
P/E 13 20 19 32 24
ROE (%) 13.9 8.09 7.86 4.71 8.25
FY2016 was reportedly the best performing financial year of the company since being listed in 2002. 3A recorded a revenue of RM387 million as compared to RM352.4 million, in FY2015. That is an increase of 9%. Generally, the revenue trend is increasing over the years.
Of the total revenue for FY2016, 33% was derived from export sales which includes Singapore (10%). The remainder 67% of sales was derived from the local market.
Profit in FY2016 (RM38 million) increased 90% as compared to FY2015 (RM 20 million). Following the strong profit uptrend, earnings per shares also rose in tandem with higher revenue and increased profit margin. In fact, profit margin rose from 6% in FY2015 to 10% in FY2016. That is a tremendous increase of 60%. Further, the increase in earnings per share is validated with the increase in return of equity.
According to the Annual Report for FY2016, the main reason for the surge in profitability and profit margin is due to targeted pricing strategy employed by 3A. The company targeted high value customer to get better margins and profits. A higher operating margin (15%) in FY2016 (compared to 11% in FY2015) also indicates that management was effective in in keeping costs in check.
Suppose if 3A keeps up the trend of increasing profits and lowering costs (the fundamentals of a business), I am confident that this year’s profit will see an improvement from FY2016.
Potentials
Not letting success to invite complacency, 3A continued to invest in the business by initiating capital expenditures such as the construction of an additional maltodextrin plant namely Maltodextrin Plant No.3. This project is tagged as a growth driver for 3A in the near future and it is funded purely from internal funds. Maltodextrin Plant No.3 will add another 2,200 metric ton of maltodextrin a month and will bring the overall capacity of maltrodextrin production to 5,500 metric ton per month.
As of May 2017, Maltodextrin Plant No.3 is at 25% capacity and that capacity is expected to rise.
The management of 3A has also earmarked RM40 million for capital expenditure for FY2017 and FY2018. About RM17 million will be used to acquire 2 pieces of land for future plant expansion.
Conclusion
I like 3A for:
  1. Its involvement in the food business. The saying in the food business has always been “Everybody’s gotta eat.”
  2. Increasing the capacity of Maltodextrin.
  3. Sound financials.
  4. High earnings growth rate of about 19% CAGR by my calculations or about 20% CAGR as calculated by FT.
3A is unappealing because:
  1. In 2010, 3A partnered with Yihai Kerry Investment Co Ltd, a subsidiary of Wilmar International Limited,  to set up a factory in Shanhaiguan, China, to manufacture food and beverage ingredients. The collaboration is still suffering losses to the tune of  RM7.3 million in FY2015 and RM5.8 million in FY2016. Losses are expected for another 3-4 years because the products are getting a slow response from consumers in China.
  2. The directors of 3A are being charged for insider trading in relation to the joint-venture with Yihai Kerry Investment Co Ltd. Corporate governance is definitely put in the spotlight.
Notwithstanding the negatives, my take is that at its current price of RM1.35, 3A is trading at a bargain. Hence, this counter is on my watchlist.
As for the cherry on top, Three-A Resources Bhd is a pretty dull name for a company and there is no coverage of this company by any research houses. These traits fit into the investment philosophy propounded by Peter Lynch (not a joke).
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