Sector financial performance:

This company, which produces premium distilled spirits and specialty wheat proteins and starches, has been grouped into food grade alcohol sector of food ingredient industry.

Food grade alcohol is produced to meet demands for distilled alcohol makers and also for food companies. Benefited from quick growth in demands for spirits alcohol products in US market (4%-10% annual growth rate), the demands for food grade alcohol have been accelerating in the past several years as indicated by the companies’ data ( a typical growth rate of more than 15%).

Therefore, we are seeing in the past several years that, due to the strong demands for premium beverage alcohol products and the nature of higher margin as premium products, food grade alcohol producers have shifted their production to this type of products and have benefited from this shifting of their focus in terms of both increases in sales and profits.

However, it seems there is a signal that fast growth in premium beverage alcohol may be slowing down while demand for industrial alcohol picked up.

We see that companies’ gross margins were significantly improved and some of them were even doubled in the past several years simply because they sold more premium beverage alcohol products.

According our analysis, a typical ratio of enterprise price/adjusted EBI is 40 with interest/EBI of 0%.

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Company performance:

It seems the demands for premium beverage alcohol products of this company have been growing very fast in the past several years as indicated by sales growth data (18% for 2017, 15% for 2016, and 23% for 2015). The growth seems to be slowing down in 2018. The real driver is obviously the strong demands for premium beverage alcohol in US distilled alcohol market in the past several years. However, the more direct reason is the successful shifting of company’s sales to premium alcohol beverage products so as to taking advantage of increased demands from premium alcohol beverage industry. During the same period of time, the sales for wheat ingredient products picked up probably resulted from the shifting of sales to more value-added products.

For the third quarter of fiscal 2018 compared with same period of 2017(20180930)

Net sales increased by 10% overall. Sales in food grade alcohol products increased about 6.8%, among of which premium beverage alcohol products sales increased 6.7% and sales in industrial alcohol products increased 7%. Sales in wheat related ingredient products also increased 19%.

For the first nine months of fiscal 2018 compared with same period of 2017(20180930)

Net sales increased by 4.6% overall. Sales in food grade alcohol products increased about 1.5%, among of which premium beverage alcohol products sales increased 1% and sales in industrial alcohol products increased 2.6%. Sales in wheat related ingredient products also increased 8.5%.

For fiscal 2017 compared with 2016

Net sales increased by 9% overall. Sales in food grade alcohol products increased about 12%, all of which came from the increase of 18% in premium beverage alcohol products.  Sales in industrial alcohol products declined by 1%. Sales in wheat related ingredient products also increased 6,5%.

For the first half year of 2017, net sales increased by 10% overall. Sales in food grade alcohol products increased 13%, all of which came from the increase of 22% in premium beverage alcohol products.  Sales in industrial alcohol products declined 4%. Sales in wheat related ingredient products also increased 6%.

For 2016, net sales decreased by 3% including a decrease of 1.1% in food grade alcohol and a decrease of 7.6% in ingredient segment. Net sales for premium beverage alcohol products (accounts for 50% of total sales of this company) increased by 14.5% while industrial alcohol down by 22%.

For 2015, net sales increased by 4.5% driven mainly by the increase in sales for premium beverage alcohol products (23%) and an increase of 0.9% in ingredient products.

Gross margins have been increasing quickly from 8.4% of 2014 to 22% of 2017 mainly because of the sales’ shifting to higher margins products (premium alcohol beverage products and specialty wheat starches and proteins) and as well the decreasing input costs. Gross margin went down by a little as growth in higher margin products slowed down in 2018.

Accordingly, its operating margin increased from 2.5% of 2014 to about 12% of 2018 with a SG&A as percentage of sales of 6% -9% as the gross margin kept going higher.

Stock price

While sales for higher margin product gained significant increase again in the first half year of 2017, the fast increasing gross margin finally had a break when entering into 2017. This stock currently has an enterprise price/EBI ratio of about 40, which we think, is relatively too high considering growth potential of sales and improvement in margin.