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Etika International: Storming The Tea Cups
In the Spotlight | 30 October 2009
By: Aw Jie Sheng
Articles (52) Profile

To murder a line off Shakespeare, Etika International Holdings’ success thus far, is about a great business idea thrust upon the Tan Brothers. Three former employees of Fraser & Neave’s (F&N) dairy division approached Kamal, Jaya and Tajuddin Tan in 1997 to establish a joint venture in sweetened condensed milk. Given that the demand for the condensed milk was stable and that the expertise presented itself, the Tans agreed to the proposition – and Etika was born.

Management should also be given credit for executing the business idea. While a relatively new entrant, Etika has managed to capture about 20% of the mature Malaysian dairies market since inception. Etika CFO Desmond Thong in an email interview, says that Etika is the 2nd largest player after F&N, and its Dairy Champ brand is the 3rd largest after F&N and Teapot (Nestlè). Desmond attributes the grabbing of domestic market share from established players, to the value positioning, superior quality and reasonable pricing of Etika’s Dairy Champ products.

No official figures exist, but Desmond estimates the total dairies market in Malaysia to worth RM2.5b per annum and grow at an average rate of 6%. The condensed and evaporated milk market alone is estimated to be worth RM1b.

Etika has also successfully penetrated overseas markets, having established a distribution network spanning more than 50 countries including ASEAN, Africa, Middle East, Central and South America and the Asia Pacific. Overseas buying houses and distributors overseas, make up for more than 50% of its dairies products.

Milking New Opportunities
Not content to rest on his laurels, CEO Dato` Kamal Tan has informally set RM1b as a milestone to achieve within the next 5 years. Desmond revealed that management has been in top gear to achieve the target. New distributors in Hong Kong and China have been appointed. This geographic segment will contribute strongly to FY09 results following the shift in consumer preference for imported milk products over Mainland products after last year’s melamine scandal.

In March this year, Etika formed a joint venture to set up a UHT Aseptic PET bottling plant in New Zealand. This is the first of its kind in Australasia and Southeast Asia and will complement its dairies division. This plant is expected to commence production in 2Q10. It also proposed in July this year to acquire the Tan Viet Xuan Joint Stock Company in Vietnam. When completed in March next year, this would solidify the Group’s foray into ready-to-drink UHT liquid milk. These overseas joint ventures and acquisitions will augment FY10 revenue growth.

The company is also keeping an eye on expenses. Etika is relocating both manufacturing plants in Johor and Selangor to a new plant-cum-warehouse facility in Klang, which is in closer proximity to its dairies division. This new plant is expected to come on-stream by 2Q10 and will hold additional production lines with increased production capacity of approximately 30% – catering largely to condensed milk. Desmond foresees greater production efficiencies, lowering product costs, and incurring substantial savings from transportation costs and lower inventory holding.

Geared For Success?
Growth through acquisition often obscures the organic growth rate of a company, as revenue and earnings of the target are booked into the company’s own account, inflating top and bottom lines. This concern applies less to Etika as the acquisition of production and distribution infrastructures are primary for capacity expansion, while fair value gains booked are negligible.

But for the first 6 months ending 31 March 2009, Etika’s gross and net gearing are at 1.2 times and 0.9 times respectively. According to data compiled by Reuters, the average gross gearing for the industry is 0.5 times while figures do not exist for net gearing.

Desmond feels that the company’s financial leverage is “very sound”. He says Etika’s bankers are comfortable with a gearing of up to 3 times, in view of the Group’s nature of business. Hence, he does not foresee any problem raising the necessary financing for further expansion. Approximately 44% of total banking facilities is for working capital purposes. Nevertheless, Desmond stressed that company has been very prudent about taking on additional bank borrowings, as Etika places great emphasis on its ability to meet all obligations.

Illiquid Assets
Etika’s share price has appreciated 147% on a year-to-date basis, outperforming the STI and the 77% gains on its benchmark the FTSE Small Cap Index.

Notwithstanding this and an upgrade to the main board, only CIMB-GK and NRA Capital follow the Malaysia-based company. In its most recent research note issued on 31 August, NRA Capital kept a “Buy” rating on Etika with a fair value of “$0.43”.

The lack of trading interest in the company might concern some readers who require liquidity in their investments. However, Desmond said that the company does not have the intention to undertake any new equity issues at the moment to boost daily volumes, when probed about the possibility.
Instead, he said that the company will continue to liase with analysts, promote Etika and engage in the necessary investor relations with the hope that both shareholders and investing public will see the potential of Etika as a long term company. Interestingly, PPB Group, which linked to the influential Kuok Group, has share ownership bordering the 5% substantial threshold.

The condensed milk manufacturer will announce its full year result for its financial year ending 30 September 2009 in the middle of November. NRA Capital expects FY09 earnings to hit RM48.6m on the back of RM613.1m in revenue. With raw material prices stabilising and the second half being a traditionally stronger period, Etika looks likely to beat this estimate.

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