3A Resources - slow and steady

 


Background:
In 1977. Founder of the company, Fang Chew Ham started San Soon Seng Food Industries Sdn Bhd (SSSFI) as liquid caramel producer.

Over many years of expansion in liquid products, SSSFI diversified into powder product manufacturing in the year 2003. Spray drying facilities were brought into the production line, catering for Caramel Powder, Hydrolyzed Vegetable Protein (HVP) Powder and Soya Sauce Powder production. In year 2007, SSSFI continued its specialty in starch-based products by launching full range of Maltodextrin into the market.

Hence, it has extensive products portfolio inclusive of Liquid Caramel(Malaysia Standard), Caramel Colour(International Standard), Caramel Powder, Distilled Vinegar, Natural Fermented Vinegar, Rice Vinegar, Soya Protein Sauce(HVP), Glucose Syrup, Maltose Syrup, Hydrolyzed Vegetable Protein(HVP) Powder, Soya Sauce Powder, and Maltodextrin.

In 2008, a major corporate development took place with the emergence of a big corporate investor, Wilmar International (directors were charged with insider trading lately on some shares dealings then) . It has gone into joint venture with Wilmar for China market but the results was disappointing with losses and no turnaround in sight. Hence, in 2017 3A has decided to sell off its stake in China JV to Wilmar.

Past Financial Performance -RM'000  (somehow not able to put up chart on this blog now & formatting is in a mess)  

	2012	2013	2014	2015	2016	2017
Revenue	306,428	302,910	311,410	352,400	387,718	411,485
Net profit	19,209	14,591	24,115	27,409	44,798	44,804
Net profit margin	6%	5%	8%	8%	12%	11%

**Net profit above excluded results from China associates which was divested in 2017.

The improved results seen in 2016 & 2017 are very much due to strategy to focus on specific customer requirement for higher profit margin  as well as expansion of maltodextrin plant No 3.



Cashflow from Operation and Capital Expenditure (Rm'000)

	2012	2013	2014	2015	2016	2017
Net Cash generated from operations	2,574	45,402	39,252	6,018	78,499	52,839
Capital Expenditure	(12,832)	(9,406)	(2,518)	(12,572)	(27,597)	(30,368)
Free Cash Flow	(10,258)	35,996	36,734	(6,554)	50,902	22,471

 
2016 & 2017 – mainly for maltodextrin Plant No 3 and land for future expansion. The expansion is done via internally generated fund as its debts level has been on the decline since 2012 (gearing is only 6% as at 31/12/17).


Equity, Debt & Cash reserve (Rm' mil)

	2012	2013	2014	2015	2016	2017
Cash & Equivalent	18	17	17	13	29	47
Debts	72	43	12	36	15	20
Equity	214	219	232	248	279	309
Gearing Ratio	34%	19%	5%	14%	5%	6%

Return on Equity (ROE) & Return on Invested Capital (ROIC)

	2012	2013	2014	2015	2016	2017
ROE	8%	5%	8%	8%	13%	13%
ROIC	8%	6%	10%	9%	17%	16%

Both ROE & ROIC are improving from single digit to double digit (13% & 16%) as a result of focus on high margin products.


Dividend

Steady growth in dividend - though on the low side with 1.7% yield. It has been paying dividend since 2006.

Revenue growing at CAGR of 6% while profit(excluding share of associates’ results - China JV, which was divested in 2017) at 19% CAGR for period from 2012 to 2017.

Margin of Safety

Using DCF method with next 10 years profit/FCF growth at range of 10% -12% pa and 3% thereafter, the indicative value is expected to be in the range of 1.65 to 1.80, at current price of 1.05, hence providing a margin of safety ranging from 30% to 40%.


Potential

1. Good and cheaper proxy to F&B sector (around 20x PE) while 3A is trading at PE around 12 times . Forward PE should be less than 10 as the completion of maltodextrin plant No 3 in 2017 is expected to provide more contribution in FY18.
2. Extensive expansion in 2016-2018 with focus on high margin products are expected to provide sustainable growth in revenue & profitability.
3. Better dividend payout could be expected as company's cash reserve has built up and its' ability to generate strong free cash flow.

Risk:

If Wilmar start to offload in open market, then its share price will be subject to heavy selling pressure in the already soft market. Though its not risk but may cause share price to go lower if that happen.

More competitors are coming as highlighted in its reports and this may squeeze its profit margin.

Positive
1. F&B business is generally more stable and demand shall grow steadily over time, especially its overseas sales. 
2. Profit compounding at 19% over the last 5 years is commendable.( strong management capability) 
3. Expansion is funded mainly from internally generated cash.(indication of a strong cash flow business)

Negative

- few board members charged with insider trading, this has put the management's integrity in question., though there is no reported incident of mismanagement in company's affair so far.

My view:-

The current down market provides a good opportunity for me to accumulate 3A at 1.02 - 1.06 as a mid to long term hold as it has shown the potential to grow steadily over the years. The only concern that I have for not building a bigger position is due to the insider trading charges on its directors, which put the integrity of major shareholders and key directors in question.

Please do your own evaluation if you like to have 3A in your portfolio too.