3A Resources, Distinctions All The Way With Their 20% Placement

You can't hit all the balls pitched to you, I guess. A good friend asked me to look up 3A two weeks back. I said, I don't even know what they did. I did looked it up, its principal activities were manufacturing and selling of food and beverage ingredients. That didn't look too exciting, although I did note that it was a growth based company, having been moved to the Main Board from Mesdaq.

But without further information, the stock was looking quite expensive at 80 sen. Now that the news is out, you wished you had some at 80 sen. Gawd, they placed out 20% new shares to Wilmar International. What a platform!!! I think that is like placing shares to Warren Buffett, seriously. Wilmar has done so well in palm oil, and has made waves moving to China with an upcoming listing in HK. Their China vehicle will focus on food, water and related industries. It will take a huge person to bet against Wilmar. But, you cannot hit all balls pitched to you, particularly when you have no idea what was happening. Good job on those who managed to buy early.

3A Resources Berhad was incorporated in1977 as a family business producing soy sauce. In 1989, the family business was incorporated into San Soon Seng Food Industries. 3A listed on the on MESDAQ on 13/8/2002 and subsequently moved the Main Board of the Bursa Malaysia on 18/6/2008.
3A is one of the leading ingredients manufacturers in the food and beverages industry. All the products manufactured by the subsidiary have been certified as HALAL by the Islamic Development Department of Malaysia. It is also ISO9001 certified by the Standard Industrial Research Institute Malaysia for its quality management system.

Aside from its main products, the company also has two additional products, namely caramel powder and hydrolyzed vegetable protein powder. Currently, the group exports approximately 30% of its group sales to 25 countries. Three A's latest product is glucose-based powder, maltodextrin, which is used in infant milk powder and 3-in-1 instant beverage. This product was previously imported from the US, Thailand, China and Europe. Its customers include multinational corporations in Malaysia such as an American supplier of chili sauces to food chains in Malaysia and Hong Kong based Lee Kum Kee group which produces oyster sauces.

The new glucose plant is already running at about 40-50% capacity, since its
completion in 4Q08. Aside from additional external sales, the availability of
glucose means the company is now running its maltodextrin plant at almost
full capacity. Previously, limited feedstock had kept production at just about
half of its 1,200 tonne per month capacity.

3A has made very good inroads into this relatively new market. Its
maltodextrin plant is the only one in Malaysia and has been operational since
mid-2007. Maltodextrin is a white powder with little sweetness, has a bland
taste and is widely used as fillers or bulking agent.

In particular, the company has been quite successful in tapping into the 3-in-
1 dry beverage mixes market segment. Prior to 3A’s entry into the market, all
of the maltodextrin consumed locally is imported. The company’s proximity to
end-user companies gives it a strong home ground advantage. Its
maltodextrin is also competitively priced against those imported from the US
and Europe.

Aside from 3-in-1 mixes, 3A is also eyeing other segments of the
maltodextrin market, such as the infant milk powder industry. Following
positive feedback from end-users, both local and in the region, the company
is now planning to set up another maltodextrin plant capable of producing up
to 2,000 tonne per month.

If all goes to plan, the new plant will be operational by 4Q2010 – and will
underpin growth in 2011-2012. As a stopgap measure, 3A intends to upgrade
its existing maltodextrin plant, which would boost output up to 1,500 tonnes
per month, to cater to rising demand.

Additional feedstock requirement for the new maltodextrin plant was already
taken into account when 3A was building its glucose plant last year. The
glucose plant, with current capacity of 7,000 tonne per month can easily be
upgraded to produce up to 12,000 tonne per month with the incurrence of
just a small additional capex.

The Proposed Private Placement will entail the issuance of up to 20% of the issued and paid-up share capital of 3A. Based on the issued and paid-up share capital of 3A as at 30 September 2009 of RM61,600,003 comprising 308,000,019 ordinary shares of RM0.20 each ("3A Shares"), a total of up to 61,600,003 3A Shares ("Placement Shares") may be issued pursuant to the Proposed Private Placement.The Placement Shares are proposed to be placed out at an indicative issue price of RM0.75 per Placement Share. The issue price of RM0.75, represents a discount of approximately 12.63% to the five (5)-day WAMP up to 02 October 2009 of RM0.8584.The Placement Shares are proposed to be placed out to strategic third party investors, namely Wilmar International Limited ("Wilmar" or “Investor”). Wilmar has given a letter stating that it is interested to subscribe for 61,600,000 Placement Shares at RM0.75 per Placement Share. Upon the completion of the Proposed Private Placement, Wilmar will emerge as new substantial shareholder of the Company with equity shareholdings of 16.67%. The Proposed Private Placement is to enable 3A and Wilmar to collectively venture into any future overseas investments.

p/s photos: Lee Ji Ah

On A Clear Day, I Can See Forever

My blog has mostly been about a lot of bashing and flaming, in particular when major institutions do not execute or plan well. A diversion for now, which I hope will be more frequent in the future, are two major developments worth noting:

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KUALA LUMPUR, Aug 11 — CME Group Inc, the world’s largest derivatives exchange, will develop a US dollar crude palm oil (CPO) futures contract using settlement prices of Malaysia’s ringgit contracts for trading on CME Globex. CME will work with stock exchange operator Bursa Malaysia to offer the cash-settled futures contract in the United States aimed at globalising the Malaysian CPO futures market, a statement from the two companies said.

The two parties will also explore trade matching services, product licensing and minor cross-equity investments in a partnership still subject to regulatory approval. The Chicago-based exchange operator said the proposed partnership will increase its presence in Asia and expand its transaction processing business opportunities. Specific terms of the partnership will be announced later, the two exchanges said in a statement. Bursa has introduced a dollar-based palm oil contract. — Reuters

Comments: The FUPO was a start and fizzled just as many had expected (including this blog), but looking further ahead, the instrument was needed as a negotiating point to get CME to launch a similar US-dollar based contract as well. Getting it on CME is no guarantee of success, but will be the best platform for getting things right. Volume and liquidity will need to start on CME side before getting similar activity on FUPO during Malaysian trading time. It has a decent chance for success now as being on CME would at least lure the arbitrageurs. The fact that there is a corresponding ringgit based contract makes for good arb opportunity. Volume begats volume, soon I hope to see FUPO trading just as active as the ringgit based contract. The major local palm oil players have a role to play (which they haven't been doing so far) - all have been sitting back pooh-poohing the FUPO and just putting through contracts through the ringgit side. You as the major CPO players have a big role to play, you have to lead, try funneling 25% of all hedging / selling activity through FUPO because in the end its you fuckers who will benefit. Having a USD contract for futures will negate a lot of currency hedging required as you people still borrow extensively in USD. You cannot just sit back and say to Bursa "let's see what you can do". You know very well you will be the major players in any CPO based contracts - unless you think this is not going to help shore up your business strategy and options (which means you are plainly stupid to think so when there is a government body helping you indirectly to better sell, better hedge and better market your product).

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KUALA LUMPUR, Aug 11 — Malaysia’s central bank has directed a sweeping overhaul in the board of directors of the country’s largest banking group Maybank, in an unprecedented government censure on a board of a financial institution. The little-publicised revamp followed government displeasure at the controversial acquisition of an Indonesian lender by Malayan Banking (Maybank) last year, officials say. Bank Internasional Indonesia (BII) was bought from a consortium led by Singapore’s Temasek Holdings at a price that was deemed too high.

Prime Minister Najib Razak, who directed Bank Negara to review the transaction, has endorsed the central bank’s decision calling for a Maybank board revamp, the government officials say.

“The decision was also made that the board revamp will be carried out in stages and directors who are retiring won’t be re-elected to the board,” said a senior government official who was involved in top-level discussions on Maybank’s Indonesian venture.

Maybank’s main shareholders are national equity fund Permodalan Nasional and pension fund Employees Provident Fund. Bank Negara declined comment for this article, citing its policy of not discussing issues involving individual financial institutions. Maybank executives, including its chief executive officer Abdul Wahid Omar, also declined repeated requests for comment for this article. But the bank did announce the retirement of two directors and the appointment of three new members mid-last month. Between end-October last year, when the acquisition of BII was completed, and this March, three directors have resigned.

“This is part of the reforms that the PM is pushing for and it will raise the sense of greater accountability in the boards of government-linked companies,” said a senior adviser to Najib who is familiar with the central bank’s decision on Maybank.

In March last year, Maybank entered into an agreement to buy a 55 per cent interest in BII from Sorak Financial Holdings, which is majority-owned by Singapore’s Temasek Holdings. The Malaysian bank agreed to pay US$1.5 billion (RM5.3 billion) for the stake and then make a tender offer for the remaining 44 per cent for roughly US$1.2 billion. But the global financial meltdown raised questions over the health of banks in general and reignited criticisms that Maybank was paying too high a price for BII. Maybank’s position was further undermined when Indonesia introduced changes to its corporate takeover rules, which called on the Malaysian financial institution to sell down 20 per cent of its holdings in BII within two years of its takeover.

Bankers close to Maybank had argued that the disposal was surely to lead to massive losses. Faced with the prospect that the deal could adversely hit Maybank and the Malaysian banking system, Bank Negara had revoked its approval for the BII acquisition. The approval was later reinstated. The deal was finalised after the Temasek-led consortium lowered the purchase price for the transaction by US$220.5 million for the 55 per cent interest in BII. In Bank Negara’s review, which was completed in April this year, it concluded that Maybank’s purchase price for BII was too expensive. The central bank also concluded that the Malaysian financial institution did not put in place adequate measures to protect itself in the event that the deal encountered problems, the government officials said. — The Straits Times

Views: The article is so succinct and clear, I don't really have to add anything. Interested readers can search this blog for my previous postings on Maybank and BII.


p/s photos: Lee Ji Ah

Why I Like DRB-Hicom

Why no one is covering DRB-Hicom? I tried looking around and the most recent research report was sometime last year. Is it because Syed Mokhtar is now controlling the company? Maybe, because many research houses just shrug their shoulders when its a Syed Mokhtar company, as they don't know his next move or his strategy for the company. I have been reading some developments recently and think its a good time for me to place my bets on DRB-Hicom. The company has been unfocused and kinda lack a "kingpin directing affairs", you know what I mean. Just look at the following developments over the past few weeks:

Volkswagen AG - DRB-Hicom is believed to be in talks with Volkswagen AG to carry out the assembly of CKD (completely knocked down) VW models at its plant in Pekan, Pahang. Sources said that DRB-Hicom wants to locally assemble VW cars with plans to eventually carry CKD Operations for the Audi brand there as well. However, it is understood that sales of the Audi brand in Malaysia have yet to reach a scale that would make CKD operations for the marque financially viable in the country at the moment. Sources continued that DRB wants to begin with assembly of VW first as the German carmaker has been looking to tap the Asean market where its presence is relatively small.

Double Tracking Project - DRB Hicom has submitted a proposal to construct a double track railway line from Gemas to Johor Baru spanning 250km, sources say. This proposal, which could be valued as much as RM8bn, will rival a bid by privately held Global Rail SB that is teaming up with a Chinese consortium. The Edge understands that DRB Hicom would end up working with MMC Corp, as the cargo carried on the railway track would ultimately pass through PTP.

Defence Hub - Malaysia will be made a hub for the production of defence equipment and parts to be used for the development of the regional defence industry, Defence Minister Datuk Seri Ahmad Zahid Hamidi said. "For this purpose, we will have to take several proactive measures with the cooperation of Asean countries to develop the industry in this region," he said to reporters after launching the 12th Defence Services Asia Exhibition and Conference 2010 (DSA 2010) . However, this will be only an arrangement of cooperation and not involve a defence agreement like the North Atlantic Treaty Organization (NATO). "We have had meetings with several defence industry players in Asean where they are ready to exchange products and equipment with our country," he said. Indeed the region can opt for specialisation of specific defence product and need not compete against its own Asean member country. "Indonesia is good in manufacturing some military materials that are being used by the United Nations and NATO countries as well. We should have an exchange programme where we could provide the MRO (Maintenance, Repair and Overhaul) here and we take part of their products produced in their country to be used by our armed forces," he said. Malaysia also has several defence equipment in the market whereby a local telecommunication company, with the cooperation of a foreign company, has already produced a defence communication equipment being sold in the region. Ahmad Zahid also said the region need not only be a user market, or a dumping ground for outdated defence equipment. He said several producers from Europe and the US have also agreed to make Malaysia the base for the marketing of their products and were also ready to provide technology transfer. "A meeting was held in Paris last week and this is good development," he said. "I will be discussing this with my counterparts in Asean where I will seek for cooperation so that we are able to develop this region as a producer of defence equipment," he said. With continued efforts, Ahmad Zahid said he was confident that during DSA 2012, 30 percent of defence equipment and parts will be exhibited by local producers. "I also expect not less than 10 percent participation from local players for DSA 2010," he said. Among the companies to participate in DSA 2010 will be AMP Corporation, DRB Hicom, Defence Technologies, Nadi Defence, Composite Technology Research Malaysia (CTRM), SME Ordinance, Tri Level Miltech, System Consultancy Services, Bry Air Industries, WIRA WEB, MFDM Group and WESTSTAR LDV. "Despite an economy that is not favouring the defence and security industry, the participation is still high," he said. In fact, Malaysia should take the opportunity where in 2016 the defence sector expenditure in Asia is expected to rise to 32 percent or US$480 billion of the global defence expenditure.

Financials - DRB-HICOM BHD registered a higher revenue of RM6.10 billion for the financial year ended March 31, 2009 as compared to RM4.01 billion previously. The company recorded higher pre-tax profit of RM774.94 million from RM376.07 million previously.

Pre-tax profit of RM774.94m with a market capitalisation of RM2.3bn??? I like the company as it has the base, the platform and infrastructure to do "a lot of things" (as hinted above). Its way way too cheap at RM1.13. I don't even have a fair value target for DRB-Hicom as it is a moving target, it depends on "when and what" projects will fall to DRB-Hicom. Even if NOTHING eventuates, the company can carry on the way it has and still be considered as "cheap". I rate this a buy and hold kind of stock. I can target RM1.50 over 3 months or even RM1.70 over 12 months if some of the things mentioned above were to eventuate.

It is pointless to even attempt a fair value as there is no benchmark for such a company that is being restructured to be elevated to the next level.

Research houses should seriously consider covering the stock now. I like the stock also as I can see strategic accumulation by serious parties, and the fact that Khazanah still holds a strategic stakes and it looks ripe for some serious "projects in store" for DRB-Hicom to elevate it to the next level. There are no serious contender to rank as a defence-heavy industry-automotive vehicle in our country.

Share Price: RM1.13
Shares: 1.933bn
Market Capitalisation: RM2.33bn


p/s photos: Lee Ji Ah