23 April 2012
Three-A Resources food processing plant in China to commence operation this month and to account for 5% earnings in 2012 and 23% in 2013- AmResearch
Once Three-A Resources Bhd’s hydrolysed vegetable protein plant in China commences operations this month, the company will be able to tap into the burgeoning Chinese food and beverage (F&B) market.
Three-A is not alone in this venture. In late 2009, Wilmar International Ltd took up a 15.65% stake in Three-A.
The following year, both companies teamed up in a 50:50 joint venture to set up the plant in China to manufacture soya protein (technically known as hydrolysed vegetable protein) and related by-products, which are used in sauces and seasonings such as soya sauce, oyster sauce and snack foods.
Analysts said it is widely expected that Wilmar will channel Three-A’s products through its extensive sales and distribution network in China to food processors, particularly soya sauce producers.
Wilmar distributes soya beans to both home-grown and multinational soya sauce makers in China.
According to an AmReseach report last Friday, the plant is located close to Wilmar’s processing plants, including Qinhuangdao Goldensea Foodstuff Industries Co Ltd, China’s largest soya protein producer.
The manufacturing plant in Qinhuangdao, China. It is widely expected that Wilmar will channel Three-A's products through its extensive sales and distribution network in China to food processors, particularly soya sauce producers.
This would give rise to “immense logistical synergies and distribution strength”, the report noted.
“Given that soya sauce is consumed by more than 70% of China’s 1.3 billion people, there is a huge growth potential for Three-A in the long term,” said an analyst who tracks the F&B sector.
AmResearch added that the absence of quality competition in China would also lend strong support to Three-A’s pricing power as its products meet European standards.
Contrary to what most would expect, the report said most local producers in China operate on a much smaller scale, while the few larger ones lack international accreditation.
Three-A also aims to double its China plant’s current capacity of 6,000 tonnes to 12,000 tonnes by end-2013, according to the report.
AmResearch expects the China plant to account for 5% of Three-A’s earnings in 2012 and 23% in 2013. The payback period for the plant is expected to be 18 months.
The research house expects Three-A to post a net profit of RM20.2 million on a revenue of RM296.6 million in 2012 and a net profit of RM29.6 million on a revenue of RM330.5 million in 2013.
In 2011, Three-A registered a net profit of RM15.9 million on-revenue of RM268.8 million, compared with a net profit of RM16.9 million on revenue of RM248.9 million in the previous year.
In the last two years, Three-A’s earnings have been affected by cost overruns due to higher raw material prices, such as for tapioca starch, soya beans, and sugar.
However, the price of tapioca starch, which accounts for about 40% to 50% of Three-A’s raw material costs, has been falling and has come off 33% since an all-time high of US$630 (RM1,928) per tonne in August 2010 to US$420 per tonne at press time.
AmResearch believes the worst is over for Three-A in terms of margin compression, given that globally soft commodity prices have mostly been flattish YTD, and expects prices to remain relatively stable on the back of the softening global macroeconomic outlook and the absence of speculative activities.
On its local operations, Three-A has set up two new plants since the JV with Wilmar in 2010.
Its second maltodextrin plant started production in mid-2011 and has been performing well due to pre-commited orders for the infant food product industry.
AmResearch believes the plant could reach full capacity well ahead of Three-A’s internal target of 12 to 14 months. Three-A’s maltodextrin capacity is believed to be around 4,000 tonnes.
Maltodextrin is a starch-based additive that is also used as a bulking agent in powdered instant beverages and soup mixes as well as infant milk powder. Three-A is said to be the only producer of maltodextrin in Malaysia.
Its second caramel colour plant was commissioned in November 2011, bringing its total capacity for caramel colour to 8,000 tonnes from 4,000 tonnes previously. Three-A recently said that it has ready buyers to take up the additional capacity.
Caramel colour is a colouring agent used in the F&B industry for products such as soft drinks, sauces and seasonings, and dairy products.
Closing at RM1.16 last Friday, Three-A is trading at multiples of 28.7 times its earnings in 2011. Its price-earnings ratio (PER) is slated to fall to 22.6 times in 2012 and 15.4 times in 2013 based on AmResearch’s earnings forecasts.
AmResearch maintains its “buy” recommendation with a price target of RM1.50, based on a target PER of 20 times earnings in 2013. AmResearch said this was close to the average 18 times of several China consumer stocks it selected.
Three-A shares surged from 60 sen in September 2009 to an all time high of around RM2.30 in February 2010, but have been on somewhat of a downtrend since.
Since early February this year, Three-A has shed about 17% in market capitalisation.