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Abterra is an integrated supply chain manager in the supply of minerals and resources. Photo: annual report


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Clement (CF0), Jaffe (CEO) and Mahesh (executive director)
of Abterra. Photo by Sim Kih

IT IS not every day that you get a company announcing a 1,400% increase in net profit. Hence, I was honoured to be present when the management of Abterra Limited announced the good news during its results briefing at the Intercontinental Hotel recently. 

FY2008’s revenue jumped 235% to S$392 million. Gross profit improved by 489% to S$18.6 million, translating into a gross profit margin of 4.7%. Net profit was S$13.8 million, a 1,403% improvement over FY2007.

“This is only the start,“ the CEO of Abterra, Mr Jaffe Lau, told the 80-strong audience. “This is the first time that we have a full-year contribution from our PRC operations. Moving ahead, our strong networks in PRC will enable the Group to grow its supply chain management operations more quickly. Our second growth driver comes from the soon-to-be completed M&A activities.” 

As background, Abterra used to be a construction company called Hua Kok International Limited. It changed its name to Abterra Limited after Hong Kong’s Prosperity Steel bought over the company in 2005. It continued to incur losses until Hong Kong-based General Nice Resources took a 65% stake in the company in October 2006. 

The new management managed to turn it around in FY2007 with a profit of S$1 million. Net profit for the six months ended 31 Dec 2007 (that is, 1H 2008) was S$5.2 million.

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The company trades mainly in iron ore, coking coal and
metallurgical coke. Photo: annual report

Business operations

Abterra Ltd is primarily engaged in developing the mineral business in countries such as PRC, Australia, India, and Indonesia. It trades mainly in iron ore, coking coal and metallurgical coke.

These minerals are used in the refining of steel products.
 Mr Mahesh Mehta, the Executive Director, explained the business model of the company simply, “We handle the relationships between the suppliers, ships, banks and customers. While some may think that this business has low barriers to entry, it is more complex than what one sees.”

He added: “There are very few companies which can manage these delicate relationships between the suppliers and buyers. Suppliers, who have made their money during the commodity surge last year, have the financial muscle to hold on for better pricing. But you have buyers who are chasing you everyday for supplies. We are in a unique position to negotiate with the suppliers and buyers. We are not talking about tens but hundreds of suppliers and buyers.

“On the other hand, we have to liaise with numerous bankers and shipping companies to ensure the LC or financing has been arranged and the tankers are there at the ports to pick up the goods. Abterra has a presence in the PRC, Hong Kong, Indonesia, Africa and Australia to co-ordinate these transactions on a daily basis.” 

I asked what exactly its staff does. “Abterra has a very hands-on approach in handling its business. We send our people down to the ports to ensure the efficient delivery of our goods. Our people are on the ground daily to rectify any problems that may occur as a result of late delivery, human errors etc.” Mr Mehta added. 

The booming infrastructure projects in the twin dragons -- China and India - have no doubt generated more sales for the company. “China is the largest importer of iron ore while India is the largest exporter of iron ore. China is the largest exporter of coking coal and m
etallurgical coal while India has no coal reserves! Our presence in our markets makes us a very valuable partner to both suppliers and buyers in these two markets. Last year, PRC imported 22 million tonnes of iron ore, while Abterra did less than 800,000 tonnes. That’s a long way to go before we hit saturation point.” Mr Mehta explained.

He went on to elaborate that Abterra is in a volume game. The company benefits from higher volume traded between the different markets. The daily fluctuation in commodity prices, on the other hand, has minimum impact on the profit margins of the operations. However, it does affect sales as the suppliers are less inclined to sell at the lower prices.  Handling only the supply chain aspect of the operations, Abterra does not take position in the products. It also does not enter into long-term contracts with its suppliers or customers.  Abterra generally calculates the risk-return spread, ensuring that purchases are only committed after a seller has been secured. These transactions are based on spot prices. 

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Clement Leung, CFO: Photo by Sim Kih

Financials

Despite reporting a commendable set of financial results, the earnings per share is only 0.39 cent, which translates into a historic PE of 18x. This is not cheap for a young company. Moreover, its thin gross margin (5%) does not make it an attractive proposition compared to other PRC companies. 

Mr Clement Leung, the CFO of the company, shared with several analysts and myself in a conversation after the briefing that the company is still growing. Organically, it has, through its parent company, built up good relationships with many potential suppliers and customers in the PRC. This provides Abterra with the confidence to extend its operations beyond China rapidly. 

“We have entered into many strategic acquisitions in the past twelve months. The most important is the acquisition of Shanxi Loudong, one of the largest meta coke producers in PRC. Loudong will transform Abterra into an integrated supply chain manager in the supply of minerals and resources.” 

Shanxi Loudong also provided a profit guarantee of RMB 185 million for the financial year ended 31 December 2008. “Shanxi Loudong has a better margin. If we can complete the acquisition by the end of the year, our margins should theoretically improve.” Mr Leung added. 

When asked about the weak operating cash flows, he replied, “Abterra has provided deposits of approximately S$70 million, which were reflected in the FY2008 cash flow statement. This resulted in the group posting a negative operating cash of S$103 million. The cash flow matter would be resolved once the acquisitions are completed.” 

The company ended the year with S$54.6 million cash and cash equivalent and no long-term borrowings.  (Note: The S$12.3 million long-term debts were the results of the convertible bonds issued).

Mr Leung said the company has secured sufficient financing to grow its business in FY2009. “Getting credit is extremely difficult in the current market condition. The fact that we have ten global banks backing us with credit lines, proves a point.”

Future plans

During the briefing, a question was posed to Mr Lau with regards to earnings in FY2009. He said: “If we can complete our Loudong acquisition by the end of the year, we would have a lot more things to share.” He also commented that he would be exploring collaboration or acquisition opportunities. “Currently, the weak market sentiment does not allow us to raise funds via the equity market. We are evaluating all possibilities. 

“We believe the growth in Asia would continue. The next 10-20 years belong to Asia. We have to grab this opportunity to establish ourselves as a leader in supply chain management. It is no doubt a daunting task but the company shares the belief that  the pain is temporary but the glory is forever.” 

For me, it was an enjoyable evening listening to a small company with great ambitions. Only time will tell whether the Company has what it takes to grow the business but nobody can doubt the ambition of this management.


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