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.

FOMO then, FOGI now?

With the exception of Big Cap, stock prices of many small and medium cap stocks on Bursa have seen quite a fair bit of correction. Yes, many people (me included) would have seen some unrealised gain made evaporated fast.

Many stocks that were showing good growth story and financials last year eg Superlon, SCGM, RCECap, Unisem, (Hengyuan - I am not sure about this ??) etc have come down quite drastically when the most recent performance did not meet investors' expectation.

No one knows what is forthcoming and will there be a more severe correction, that is a billion dollar question. To what extent Trump's trade tariff proposal will have on world's economy and equity market is anyone's guess. I still believe in just sticking to analysing the fundamental and growth prospect of a company. Though it will still be subject to overall economic situation but that is something so difficult to predict. 

Last year we have seen the above mentioned stocks hitting all time high because of Fear Of Missing Out (FOMO). When these companies' financial performance did not meet the expectation of investors for 1 or 2 quarters, they were dumped ( well, I do not think all are under Pump and Dump game). There were various reasons cited for the under performance, mostly due to materials and labour cost escalation. With the recent price correction, I see these companies are getting more attractive for investment case. If those factors affecting the last 1 or 2 quarters performance are not expected to last or damage the fundamental of the companies, then buying them at down cycle could be very rewarding provided we have the power to hold till up cycle is back. Now, when they are selling at more attractive price, we have another fear - Fear Of Going In (FOGI)??

My question, which fear has higher risk - FOMO or FOGI? I believe you and me may have different answer. If you have a longer investment time horizon, I personally believe it is time to start the accumulation of good companies that we never had the chance to buy when they were selling at premium earlier! Well, I intend to do it in stages.

  

What is more important - P/L, B/S or C/F?

The recent correction on Bursa are making some stocks look really attractive compared to a year ago. I asked my self this basic question - what is more important to me at this stage ( as I believe to different people at different stage, it varies) - my own balance sheet, profit & loss or Cashflow? Once that objective is clear, it would be easier for me to pick the right stocks in my portfolio. 

Let me put this into better perspective.

Balance Sheet:
+Non liquid assets (property)
+Liquid assets ( stocks, cash, unit trusts)
-Liabilities (Loan)
= net worth

To increase my net worth, the value of my non liquid and liquid assets must go up or my liabilities must go down. At the moment, liquid assets have been my focus to achieve this.

Profit and Loss:
The dividend income, interest income, gain/(loss) on disposal of stocks, unrealised income/(loss) on stocks/unit trusts/ revaluation gain/(loss) of property, interest expense. 

Cashflow:
Inflow : Dividend received, Interest received, proceeds from sale of stocks/unit trust,
Outflow: Purchase of stocks/unit trusts, loan repayment, living expenses, tax if any.

As these 3 statements are inter-related, the same items may appear in more than one statement. But which is the most important to you now as the investment strategy may be slightly different.

For example, if the focus is growing net worth, then unrealised gain could also help to achieve that by investing in assets which may not be liquid but provide good capital growth or stocks. It may not give much dividend but potential capital growth is there(of course one can always sell it to realise the gain, and hence provide cashflow too).

If the focus is getting sustainable cashflow to support living expenses, then dividend and interest are more important, and of course we can sell some assets to provide the cashflow required (but may not be sustainable).
Hence, Profit & Loss appears to be the end results based on the above strategy. Did I put my focus wrongly by looking at my own monthly or yearly profit and loss performance? (Are we also doing the same when evaluating a company's performance??)
If you do have the same dilemma, please have a thought and ask yourself what is your focus now. Besides looking for undervalued stocks, our objective will also help us to decide which stocks fit into the strategy of either growing net worth, showing good profit and loss  or providing sustainable cashflow to us or a mixture of all.








  
  

Time to Buy or Sell?

All companies with financial year ended 31 December have reported FY17 results by now, from a quick glance, I noted most companies were not doing that well compared to FY16, in terms of financial performance and of course, share price movement too.

 

Though KLCI is showing good uptrend, it is very much due to performance of big blue chips, especially consumer as well as banking counters. Many value and growth stocks have been hammered when the growth momentum expected were not shown or quarterly profits were badly affected by foreign currency fluctuation, higher input cost, labour shortage (the most common reasons or excuses provided in performance review).

 

As a result, many stocks fell to multi years low and historical PE now looks very attractive, but most would think that there could be a major correction this year (based on 10 year cycle prediction?) or the current market is on down trend, it is time to sell those stocks that are not showing good performance in the latest quarterly results. They are either sitting on huge cash reserve or switch to stocks that are turning around or showing strong growth YOY/QOQ.

 

This is the time that really test our investing process and thought - what have we been practising? Many questions came into mind and of course, there is no definite answer to them but this is the time to show what we understood about long term stock investment.

 

To me, one important belief remain unchanged, only buy companies or businesses you understood and are financially sound as we don't know when the next financial crisis will come to hit us. Financially sound companies tend to stand the test of crisis better. There are many articles on net cash company, high asset backing companies, strong cash flow etc, I always believe we need to carry out our own verification before jumping on board. Hopefully we can all earn a decent return in the volatile market too. All we need to do is .....take action at some point in time!!

HRnet on SGX

I have been keeping track on HRnet since its listing in Jun 2017 (mentioned on my blog here). I like its business model which is asset light, strong operating cash flow and easily expandable, especially with a strong war chest after its IPO (sitting on close to S$280 mil cash reserve). Hence, I have started to accumulate at 80 cents and lately there are some research reports by analysts on the stock (here).

It's expected to record ~S$40 mil net profit for FY17. If the management can utilize the cash reserve to generate the following returns, it will have the following impact on its profit (Based on RHB's research, lets assume it has budgeted S$200 mil for acquisition):-

5% will give additional PBT of $10mil
7.5% will give additional PBT of $15mil
10% will give additional PBT of $20 mil

My investment case is basing on growth potential from M&A and ride the recovery in labour market of Singapore. Target price from analysts ranging from $0.96 to $1.14, which indicates upside potential of 20% to 40%, which I tend to agree after my own estimate basing on discounted cash flow and PE valuation basis.

Please do your own valuation if this stock excites you.