THREE-A Resources (3A; RM1.81) is staying well on track in terms of its expansion plans. The company has earlier mapped out a very clear growth strategy, which should support strong double-digit growth over the next few years.
3A is a leading producer for food and beverage ingredient products such as caramel colour, glucose and soya protein sauce. It is the only local manufacturer for maltodextrin, widely used as fillers or bulking agent in dry beverage mixes, soups, infant milk powder, etc. In addition to holding a dominant share of the domestic market, 3A also exports its products worldwide. Exports currently account for over a quarter of the company's total sales.
The company has been enjoying robust growth in demand for its range of products. Sales grew at an annual compounded rate of over 24% over the past five years. Demand for maltodextrin, in particular, has been very strong since its inclusion into the company's product range in 2007. 3A has been gaining market share through import substitution. ''
Its 1,200 tonnes per month maltodextrin plant has been running at full capacity since last year. A second plant, with a rated capacity of 2,000 tonnes per month, is currently under CONSTRUCTION  and is slated for completion by end-2010 or early-2011.
To support the additional maltodextrin production, 3A is also building a third, 8,000 tonnes per month glucose plant. This will boost total capacity for the product to 21,000 tonnes per month. Utilisation for the second glucose plant, which was commissioned end-2008, is already nearing full capacity. Glucose is used both as feedstock for the production of maltodextrin as well as sold externally.
Additional sales from the new glucose and maltodextrin plants will underpin growth over the next two-three years. Furthermore, we should also start to see contributions from its joint venture in China within the next year or two.
To recap, 3A is partnering Singapore-listed Wilmar International in setting up manufacturing facilities for food ingredient products in China. The first facility is to be located in Shanhaiguan, Hebei and is estimated to cost some US$12 million (RM38.8 million). If all goes to plan, the plant would be operational before end-2011. And depending on its performance, the joint venture is likely to be expanded to include another two new plants. Total investments could amount to as much as US$40 million. 3A holds a 50% stake in the venture.
Net profit estimated to grow 34% in 2010
3A reported a solid set of earnings results for the first three months of the year. Sales grew a strong 85.4% year-on-year (y-o-y) and 11.1% quarter-on-quarter (q-o-q) to RM61.3 million on the back of strong demand and a gradual increase in selling prices.
Meanwhile, net profit more than doubled from the previous corresponding quarter to RM5.9 million in 1Q10. Earnings in the latest quarter also registered improvement from the RM4.5 million reported in 4Q09.
Apart from stronger sales and improved efficiency, we believe better margins in 1Q10 were also due to the gradual selling price hikes implemented over the past few months. Raw material prices, primarily for tapioca starch, have been trending higher in line with the global economic recovery. We estimate tapioca prices to rise to an average of about US$420 per tonnes in 1Q10, compared to roughly US$260 per tonne in 1Q09.
Typically, there is a short mismatch in terms of 3A's cost of raw materials and its selling prices as the company revises its selling prices on a gradual basis. Nevertheless, it has always managed to pass on the higher costs. Indeed, 3A remains a competitive producer in both the domestic and export markets since rising raw material prices affect all producers.
The company is on track to meeting our estimated net profit of RM24.3 million this year, which is a strong 34% growth on the year. Net profit is forecast to expand further to RM29.9 million by 2011.
The stock has done remarkably well over the past 12 months, hitting a high of RM2.36 in mid-February 2010 from 41 sen this time last year. We expect 3A will continue to perform well over the longer term, tracking its earnings growth.
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