Three-A Resources Bhd (22 Feb 2025)
(1) Historical performance
Since January 2013 to present day, the company stock price remained at RM0.80.
From January 2013 to the present day, its sales and earnings experienced significant fluctuations. Below is a detailed overview of what happened to the company's sales (revenue) and earnings (primarily profit before tax, with net profit used where specified) throughout this period, based on the available data up to Q3 2024.
Sales (Revenue) Trends
The company's revenue showed a general upward trend from 2013 to 2022, followed by a decline in 2023, with quarterly fluctuations in 2024:
2013: Revenue started at RM302.91 million.
2014-2017: Revenue grew steadily, reaching RM411.4 million by 2017, driven by expanding market share and strong product demand.
2018: Revenue increased further to RM437.9 million, a 6.4% rise from 2017.
2019-2020: Revenue stabilized around RM436 million, maintaining consistency despite external challenges like the COVID-19 pandemic, supported by strong export growth.
2021: Revenue surged by 18% to RM515.6 million, reflecting higher selling prices and increased sales volume.
2022: Revenue peaked at RM658.7 million, a 28% increase from 2021, marking the highest sales in the period due to robust demand and market expansion.
2023: Revenue declined by 8.3% to RM604.0 million, attributed to weaker demand and heightened competition.
2024 (Q1-Q3): Quarterly revenue fluctuated, with Q1 at RM148.757 million, Q2 at RM139.916 million, and Q3 at RM142.078 million, suggesting a lower annualized pace compared to prior years.
Earnings (Profit) Trends
Earnings, primarily measured as profit before tax (with net profit noted for 2023), fluctuated significantly, reflecting both operational successes and challenges:
2013: Profit before tax was RM16.12 million.
2014: Profit rose sharply by 63% to RM26.27 million, driven by improved operational efficiency and cost control.
2015-2016: Profit continued to grow, reaching RM30.35 million in 2015 (up 15.6%) and RM53.4 million in 2016 (up 76%), fuelled by strong sales growth and favourable market conditions.
2017: Profit peaked at RM55.8 million, a 4.5% increase from 2016.
2018: Profit dropped dramatically by 38.7% to RM34.2 million, due to unprecedented increases in raw material costs, despite revenue growth.
2019-2020: Profit recovered to RM40.2 million in 2019 (up 17.5%) and RM40.7 million in 2020, aided by stable costs and export demand amid the pandemic.
2021: Profit surged to RM62.5 million, a 53.5% increase, driven by the same factors boosting revenue—higher prices and volumes.
2022: Profit declined by 23.5% to RM47.8 million, as rising raw material prices and supply chain disruptions offset record revenue.
2023: Net profit increased by 29% to RM45.2 million (from RM35.1 million in 2022), despite lower revenue, due to optimized sales mix and cost management.
2024 (Q1-Q3): Quarterly profit before tax varied—Q1 at RM14.690 million, Q2 at RM16.359 million, and Q3 dropping sharply to RM7.559 million due to significant foreign exchange losses.
Key Observations
Growth Periods: From 2013 to 2017 and again in 2021-2022, the company experienced robust growth in sales and earnings, driven by market expansion, demand, and strategic pricing.
Challenges: Notable declines in earnings occurred in 2018 (cost pressures) and 2022 (rising costs and disruptions), while revenue dipped in 2023 due to market conditions.
Resilience: The company demonstrated resilience in 2019-2020 during the pandemic and in 2023 with improved profitability despite lower sales.
2024 Variability: Quarterly data up to Q3 2024 shows inconsistency, with a significant profit drop in Q3 due to external financial factors.
Conclusion
From January 2013 to the present day (up to Q3 2024), the company's sales and earnings underwent notable changes, reflecting periods of growth, stability, and challenges. Revenue grew from RM302.91 million to a peak of RM658.7 million before declining to RM604.0 million, while profit before tax fluctuated between RM16.12 million and RM62.5 million, with net profit reaching RM45.2 million in 2023. Despite these financial dynamics, the stock price remained constant at RM0.80, suggesting that market valuation might not align with the company's financial performance.
Consistent Risks and Bad Stuff Impacting Sales and Earnings
Raw Material Price Volatility
Description: The company has faced recurring fluctuations in the prices of key inputs such as tapioca, corn starch, sugar, and soybean meal. These fluctuations are driven by supply-demand imbalances, weather disruptions, geopolitical events, and global trade uncertainties.
Impact: Rising raw material costs squeeze profit margins, especially when the company cannot pass these increases onto customers through higher prices. This has been a notable drag on earnings in multiple years, such as 2018, 2022, and 2024.
Consistency: This issue has persisted across the period from 2013 to the present.
Market Competition
Description: The food ingredients industry is highly competitive, with larger players and new entrants constantly challenging the company’s market share. This forces the company to compete on pricing and innovation.
Impact: Intense competition leads to pressure on pricing, reduced market share, and lower profitability. This has been evident in slower revenue growth or declining sales volumes in years like 2013, 2016, 2018, 2022, and 2023.
Consistency: Competition has been a steady challenge throughout the period.
Macroeconomic and Geopolitical Challenges
Description: Global economic uncertainties, such as recessions, trade tensions, and geopolitical conflicts (e.g., the Russia-Ukraine war), have disrupted demand, supply chains, and costs.
Impact: These challenges weaken consumer demand, increase operational costs, and disrupt supply chains. Notable impacts occurred during the 2008 financial crisis (with lingering effects into 2013), the COVID-19 pandemic (2020), and recent geopolitical tensions (2022-2024).
Consistency: These risks have periodically affected the company across the years.
Operational Execution Risks
Description: The company has faced challenges in executing expansion plans, launching new products, and penetrating new markets. Examples include delays in plant upgrades, capacity expansions, and market adoption issues, such as the China joint venture (2013-2016) and expansion delays during COVID-19 (2020).
Impact: Execution failures result in missed revenue opportunities, higher costs, and underutilized resources, dragging down sales and earnings.
Consistency: This has been a recurring issue during periods of growth or market entry, such as 2010, 2013-2016, and 2020.
Currency Fluctuations
Description: Foreign exchange losses, particularly from export markets, have negatively affected profitability. The company’s significant export revenue exposes it to currency risk.
Impact: Currency volatility erodes profits, as seen in Q3 2024, where foreign exchange losses caused a sharp decline in profit before tax, and in 2017.
Consistency: This has been a notable issue in years with high export activity.
Categorization: Temporary vs. Structural Issues
Structural Issues
These are long-term, inherent challenges that are difficult to eliminate and require ongoing management:
Raw Material Price Volatility
Why Structural: The company’s reliance on commodities like tapioca, corn starch, and sugar makes it vulnerable to price volatility, which is a permanent feature of the industry due to factors like weather, global supply chains, and trade policies.
Management Approach: While hedging, bulk purchasing, and inventory management can mitigate the impact, the risk cannot be fully eliminated.
Market Competition
Why Structural: The food ingredients industry is inherently competitive, with low barriers to entry for some products and constant innovation from larger players. This challenge is unlikely to disappear.
Management Approach: The company must continuously innovate, differentiate its offerings, and optimize costs to stay competitive.
Temporary Issues
These are cyclical or project-specific challenges that can be addressed or mitigated over time:
Macroeconomic and Geopolitical Challenges
Why Temporary: Economic downturns, geopolitical events, and pandemics are event-driven and cyclical. While they can have significant short- to medium-term effects, they are not permanent.
Management Approach: Diversification, flexible supply chains, and cost-control measures can help the company adapt during these periods.
Operational Execution Risks
Why Temporary: These risks are tied to specific projects or initiatives (e.g., the China joint venture losses resolved by divestment in 2017). They can be reduced with improved planning and experience.
Management Approach: Better project management, feasibility studies, and phased expansions can minimize these issues.
Currency Fluctuations
Why Temporary: Currency volatility is market-driven and fluctuates over time. It can be managed through financial strategies rather than being an inherent flaw in the business model.
Management Approach: Hedging, diversifying currency exposure, and adjusting export pricing can mitigate the impact.
(2) Current trend and future potential
Industry Trends Supporting Future Growth
The food and beverage ingredients market in the Asia Pacific region, where Three-A Resources operates, is experiencing robust growth that is expected to continue beyond 2024. Key trends include:
Market Size Growth: The Asia Pacific specialty food ingredients market is projected to rise from USD 20.48 billion in 2024 to USD 30.36 billion by 2029, growing at a compound annual growth rate (CAGR) of 8.13%.
Demand for Specific Products:
Caramel colour: The global market is expected to grow at a 10% CAGR, reaching USD 466.9 million by 2033, driven by demand for natural and clean-label colorants.
Maltodextrin and glucose syrup: The Asia Pacific market for these ingredients is projected to grow at a 7.77% CAGR through 2032, fuelled by their use in processed foods and health-focused products.
Soya protein sauce: Rising demand for plant-based products. Global soy protein ingredients market projected to grow at CAGR of 7% from 2022 to 2027, reaching USD 10.8 billion by 2027.
Consumer Preferences: Demand is increasing for processed foods, plant-based diets, and health-conscious products, particularly in high-growth markets like China and India.
These trends indicate a favourable environment for Three-A Resources, as its core products—caramel colour, maltodextrin, glucose syrup, and HVP—are directly tied to these growing segments.
Alignment of Company Products with Market Opportunities
Three-A Resources Berhad’s product lineup positions it well to capitalize on these industry trends:
Caramel Colour: Used widely in beverages and processed foods, it aligns with the shift toward clean-label and natural colouring options, which are gaining traction among consumers.
Maltodextrin and Glucose Syrup: These versatile ingredients are staples in convenience foods, sports nutrition, and other processed products, meeting the needs of busy, health-conscious consumers.
Soya protein sauce. Used in plant based products, generally cheaper than animal proteins.
Additionally, the company’s Halal certification provides a unique advantage, particularly in Muslim-majority markets across Asia, such as Malaysia, Indonesia, and parts of the Middle East, where demand for Halal-compliant ingredients is rising.
Historical Performance and Opportunities for Improvement
From 2013 to 2024, Three-A Resources experienced both growth and decline:
Growth Periods: Strong sales and earnings increase occurred between 2013–2017 and 2019–2021, reflecting the company’s ability to leverage market demand.
Decline Periods: Challenges in 2018, 2022, and 2023–2024—including raw material price volatility, competition, and operational setbacks—led to dips in performance.
Looking forward, the company has several opportunities to boost its sales and earnings from 2025 onwards:
Market Expansion: Using its Halal certification and existing export networks, the company can target untapped markets in Asia Pacific with high growth potential.
Product Innovation: Investing in research and development (R&D) to create clean-label versions of its products or new formulations (e.g., specialized HVP for plant-based foods) could attract new customers.
Operational Efficiency: Continued efforts in automation and modernization can lower production costs and improve profit margins, addressing past operational challenges.
Challenges to Overcome
Despite the positive outlook, several challenges could impact future performance:
Raw Material Price Volatility: Fluctuations in the prices of inputs like tapioca and corn starch have historically squeezed margins and remain a risk.
Competition: Larger competitors with greater resources could outpace Three-A Resources if they offer lower prices or more innovative products.
Macroeconomic Risks: Global economic slowdowns or supply chain disruptions could dampen demand or increase costs.
However, these risks are not insurmountable. The company’s past resilience—such as recovering from cost pressures in 2019–2021 and navigating the COVID-19 pandemic—suggests it can adapt with effective strategies, such as hedging raw material costs or strengthening supply chain management.
(3) Financial performance
Balance Sheet Quality
Three-A Resources Berhad exhibits a robust and steadily improving balance sheet, driven by consistent growth in its net current assets. Since 2011, the company has achieved a compound annual growth rate (CAGR) of approximately 10% in net-net current assets, highlighting strong liquidity and effective working capital management. The company adopts a conservative stance on leverage, steering clear of high debt levels and avoiding reliance on debt refinancing. Instead, it funds its capital expenditures (capex) primarily through internally generated funds, reflecting financial prudence. Additionally, the absence of share dilution over the years ensures that shareholder value remains intact. Despite a constant market capitalization, the ongoing improvement in net current assets underscores a solid balance sheet, positioning the company well for resilience and future growth.
Earnings and Cash Flow Quality
Three-A Resources Berhad has demonstrated consistent profitability and sound cash flow management, with revenue growing at a CAGR of around 5.8% from 2012 to 2023 and net income rising at a more impressive 9% CAGR over the same period. This disparity—where profit growth outpaces revenue growth—signals improving operational efficiency and effective cost control. While gross profit and net income margins have experienced fluctuations due to the nature of the business, the overall upward trend in sales and profits reflects the company’s ability to thrive amid industry challenges. Cash flow quality remains strong, as capex is predominantly financed through internal funds rather than external borrowing, reducing financial risk. This combination of steady earnings growth and disciplined cash flow management supports the company’s potential for sustainable long-term success.
(4) Business characteristics
Strengths
Consistent Financial Growth
The company has shown strong financial performance, with revenue growing at a compound annual growth rate (CAGR) of 5.8% from 2012 to 2023. Even more impressive is its net income growth at a CAGR of 9%, reflecting improving profitability and operational efficiency over time.
Strong Balance Sheet
Three-A Resources Berhad maintains a healthy financial position, with net current assets increasing at a CAGR of about 10% since 2011. This demonstrates effective management of working capital and solid liquidity.
The company funds its capital expenditures primarily through internally generated cash, avoiding high debt levels and reducing financial risk.
Operational Efficiency
The ability to grow profits faster than revenue highlights the company’s effective cost control and operational discipline. It has also sustained profitability despite fluctuations in margins, showing adaptability to industry challenges.
Conservative Financial Management
The company has not diluted its shares, preserving value for shareholders. It also avoids heavy reliance on debt refinancing, which enhances its long-term financial stability.
Product and Market Alignment
Its product portfolio, including soya protein sauce, taps into growing trends like demand for plant-based and health-conscious products. Additionally, its Halal certification gives it a competitive advantage in Muslim-majority markets, boosting export potential.
Resilience in Challenging Conditions
The company proved its resilience during economic uncertainty, such as the COVID-19 pandemic, by maintaining stable revenue and profitability.
Weaknesses
Dependence on Volatile Raw Material Costs
Profitability can be affected by fluctuating prices of raw materials. If these costs rise and are not well-managed, they could squeeze profit margins.
Market Competition
The food and beverage ingredients sector are highly competitive, and larger players could challenge the company’s market share or pricing power.
Limited Product Diversification
The company relies heavily on a few key products (caramel color, Maltodextrin, glucose syrup, soya protein sauce). This lack of diversification could pose risks if demand for these products declines or if new competitors emerge.
Exposure to Currency Fluctuations
As an exporter, the company faces foreign exchange risks that can impact profitability, as observed in Q3 2024.
(5) Valuation
Three-A Resources Berhad currently has a net cash position of approximately RM62 million after accounting for debt. Assuming 70% of this amount, or RM43 million, represents excess cash, the adjusted market value of the company's core business is calculated by subtracting this excess cash from the current market capitalization of RM394 million, resulting in a business value of RM351 million. From 2011 to the present, the company has achieved an average net income of RM30 million. This average net income yields 8.5% (RM30 million / RM351 million) based on the adjusted business value, which aligns closely with the company's historical net income margin. This indicates that the current market capitalization offers a yield roughly equivalent to the business's profitability, suggesting a fair valuation at present.
To estimate intrinsic value, a required return of 10% and a growth rate of 3% are assumed, enabling the use of the perpetual earnings formula. Applying this to the average net income of RM30 million yields a business value of RM429 million. Adding back the excess cash of RM43 million results in a total enterprise value of approximately RM470 million, or RM0.96 per share (based on 489 million shares outstanding). With the current market price at RM0.80 per share, this implies a potential upside of around 20%, which may not be substantial enough to attract investors seeking significant capital gains but provides a reasonable margin of safety. Additionally, the company has shown consistent dividend payouts, increasing from RM4.7 million in 2011 to RM12 million in 2023, with a special dividend of RM2.4 million in 2023. While the dividend yield of 3-4% may not be exceptionally high, it is well-supported by the company's profitable operations and high-quality earnings, making the stock a fair value with stable income potential.
End Verdict
Three-A Resources Berhad is recommended for conservative, income-focused investors who prioritize stability and consistent returns over aggressive growth. The stock offers a reliable dividend yield of 3-4%, supported by solid financials, including consistent profitability and a strong balance sheet, making it ideal for those seeking steady income with lower risk. While the potential upside is modest at around 20%, it provides a fair margin of safety, though it lacks significant growth potential for investors chasing high capital gains. Given its fair valuation and resilience, this stock is worth buying for risk-averse investors focused on long-term stability and income generation, but it is not suitable for those seeking rapid growth or high-risk, high-reward opportunities.
