Sector financial performance:

This company, which produces starches and sweeteners from corn mainly, has been grouped into starches &sweetener sector of food ingredient industry.

As a mature sector, it presents stable demands based on data in the past several years. However, the demands seem to be very sensitive to changes in prices, a typical impact of elastic of economy under probably competition from alternative products.

Demands as shown by the organic sales volume fluctuated in a small range and seem to be shrinking in North America and South America market but picking up in Asia and Europe areas. At the same time, the average selling price went down in those areas where we see increasing sales volume and went up in the areas where we see decreasing sales volume.

However, generally the demands have kept strong which in turn allow rooms for rising selling price, especially in north/south America. While offset the increasing raw materials cost, rising prices brought higher margins for companies in this sector. A typical gross margin can reach to 24% with an operating margin of 14%.

According our analysis, a typical ratio of enterprise price/adjusted EBI is 17 with interest/EBI of 15%, which is mainly a reflection of mature but slowing down market for starches and sweeteners, medium debt level, relatively higher sensitivity of margin to changes in sales.

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Company performance:

It seems the sales volume of this company had been basically flat before 2017, while the sales volume in Asia and Europe areas had generally gone up. It seems demand in North America and South America may be picking in 2018 after continuing decline of a few of years. There is no direct evidence indicating that the increase and decrease in volume have been driven by changes in organic demands in some certain market or by price/economy elastics. However, it seems that the changes in volume are consistent with changes in price.

For the first nine months of fiscal 2018 compared with same period of 2017(20180929)

Organic sales (excluding acquisition and currency impacts) increased by 2% due to increase of 1% in price/mix and increase of 1% in volume. Price decreased but volume increased in North America market.

For fiscal 2017 compared with 2016

Organic sales (excluding acquisition and currency impacts) decreased by 1% due to decrease of 2% in price/mix offset by increase of 1% in volume. Price decreased 1% in North America market.

For the first half year of 2017, organic sales ( excluding acquisition and currency impacts) increased by 1% driven by 1% organic volume increase, which was attributable to 10% volume increase in Asian area and 1% increase in Europe area offset by volume decrease in north America and south America. The average selling prices seems to have decreased in all four areas except for Europe area, which increase by 2%.

For 2016, organic sales increased by 3% attributable to the rising selling price (5%) offset by the declining sale volume (2%). Organic sales volume decreased in North America and South America but increased in Asia and Europe areas. The average selling prices varies in four areas. Price went up largely in North America and South America but declined in Asia and Europe due to lowered raw materials costs.

For 2015, organic sales increased by 2% driven by the organic increase of 1% in volume and increase of 1% in price. Volume in North America and Asia areas increased but presenting a declining price. The price in South America increased significantly.

Gross margins have been increasing from 20% of 2014 to 25% of 2016 mainly because of the significant rise of selling price in North America and South America in 2016 and because raw materials costs decreased faster than selling price in 2015. Gross margin pulled back to about 24% in 2017/18 primarily due to increased input costs.

Because there is no large changes in the SG&A as percentage of sales this company’s operating margin went up organically with the improved gross margin from 10% to 14%.

Stock price

This stock currently has an enterprise price/EBI ratio of around 17 (stock $101), which we think, is relatively slightly undervalued while concerns on its ability to save costs exists always.

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