Etika International Holdings: Great Company, Great Stock?

The below is excerpted from paid research done by NRA Capital dated earlier in February. Back then, NRA's Angelia Phua had a target price of $0.615. I believe it is due for a re-rating following a recent run up, possibly due to completion of several acquisitions in Vietnam and Indonesia.

There is some upside for the year with $0.80 being my target price for the rest of the year. This is premise on the growth of all its business units due to M&A, as well as, the return of consumption growth with the recovery. Potential pot holes along the way are rising costs of materials. Sugar and tin have been on an uptrend as well, with the former being hit by bad weather. This is a great company but overall not a great stock due to its poor trading volumes.

Capacity expansion to capitalize on growth opportunities

• Cost savings arising from integration of Dairies and Packaging. The recent plant visit unveiled the Dairies plant in Meru, where capacity expansion is largely completed. (Upgrading of sterilizing capacity will be completed by 3QFY9/2010). The ongoing relocation of the packaging production lines to Meru and integration with the dairies production lines will further smooth out the production process and result in cost savings in logistic, improve delivery lead time and reduce inventory holding.

• Prioritise expansion according to growth potential. Capacity expansion by about 30% each at the Dairies and Packaging will elevate capacity constraints, allowing for growth, particularly in Indonesia and new export markets in IndoChina. Etika’s past-year acquisitions into an Indonesian distribution company and a Vietnamese manufacturer-cum-distributor of milk products will provide the infrastructure to support export growth. Both Bakery and Butchery currently reside at a larger production facility to cater for expansion needs of a growing domestic market and/or export opportunities. Earlier plans to expand warehousing facilities at Frozen Food will now proceed with the F&B sector picking up.

• Improved outlook for various divisions. Etika’s growth will be underpinned by Dairies, the backbone of the Group, through the expansion of product range and market reach. The lifting of price control on sweetened condensed milk (SCM) in Malaysia will enable Etika to make faster price adjustments in response to changes in raw material prices and as a result be able to maintain a relatively stable gross profit margin (GPM) going forward. Packaging derives about 80% of its revenue from Dairies and therefore will ride on Dairies’ growth momentum. Within Frozen Food, Bakery has strong growth potential both in the domestic and export markets while the landscape for growth for Butchery is currently in Malaysia. New product development will ensure margins remain attractive at Nutrition notwithstanding keen competition in the operating markets in Australia and New Zealand.

• Valuations & Recommendations. The positive business outlook of Etika’s businesses is expected to translate into healthy earnings growth of about 25% (FY9/2010) and 17% (FY9/2011). Stronger earnings and improvement in working capital management have also led to stronger cashflow position, reduced reliance on trade finance and hence a stronger balance sheet. We maintain our PER valuations on the various divisions, and arrived at a fair value of $1.23. In view of share illiquidity and small market capitalization, we maintain our discount to valuation of 50% to arrive at the target price of $0.615. Maintain BUY on attractive valuations.