Stock Name: 3A
Company Name: THREE-A RESOURCES BHD
Research House: AMMB
Three-A Resources Bhd
(June 21, RM1.87)
Upgrade to 'buy' from 'hold' at RM1.83 with fair value of RM2.21 (from RM2.12): We are upgrading Three-A Resources (3A) from 'hold' to 'buy', and raising our fair value from RM2.12 per share to RM2.21 per share based on unchanged PER of 24 times FY11F earnings or at 15% discount to the average PERs of relative consumer stocks in China (28 times PER).
We raise our earnings estimates by 4% to 5% to reflect higher profit accretion from the recent formalisation of its China joint venture with Wilmar International. We now expect 3A to deliver earnings of RM34 million in FY11F and rising to RM40 million in FY12F from just RM22 million in FY10F.
The JV's 'blueprint' plant, which forms part of a broader plan to invest up to US$40 million (RM127.27 million) in F&B ingredients production in China, will have higher-than-expected production capacity of 50,000 tonne/month. When commissioned in mid-FY11F, the US$7 million maiden plant would boost the group's overall production capacity by an estimated 67% to 80,000 tonne/month.
Payback period is a short 18 months. The 'blueprint' plant is strategically located with close proximity to a cluster of Wilmar manufacturing hubs at Qinhuangdao seaport in China, giving rise to immense logistical synergies and distribution strength for 3A.
Beyond this maiden plant, a multiple plant expansion strategy is in the pipeline to leverage on Wilmar's extensive presence in China where it has at least 60 plants and a wide distribution network.
In our earnings model, we have only assumed contributions from just the maiden Chinese plant and only three product lines, versus six in its Malaysian plant. Hence, there may be further upside to our earnings estimates when 3A accelerates its Chinese plant expansion or broadens its product lines. Such a move appears likely.
Locally, expansion plans are on track to alleviate supply constraints due to lack of production capacity. With glucose and maltodextrin production currently operating at maximum threshold, earnings are set to get a boost from enlarged capacity of new glucose (+62% to 13,000 tonnes/month) and maltodextrin plants (+166% to 3,200 tonnes/month) by end-2010.
Net gearing is a healthy 20% for FY10F. Assuming the group gears up for more plants in the pipeline, net gearing is still a comfortable 40%. And, we are not unduly worried because of the short payback and the infrastructure advantages from its tie up with Wilmar.
At forward PER of 20 times currently, the valuation is not expensive given 3A's robust capacity-driven earnings growth from geographic and product line expansion, a strong franchise in maltodextrin production and a solid 'hands-on' management team. ' AmResearch Sdn Bhd
This article appeared in The Edge Financial Daily, June 22, 2010.
Company Name: THREE-A RESOURCES BHD
Research House: AMMB
Three-A Resources Bhd
(June 21, RM1.87)
Upgrade to 'buy' from 'hold' at RM1.83 with fair value of RM2.21 (from RM2.12): We are upgrading Three-A Resources (3A) from 'hold' to 'buy', and raising our fair value from RM2.12 per share to RM2.21 per share based on unchanged PER of 24 times FY11F earnings or at 15% discount to the average PERs of relative consumer stocks in China (28 times PER).
We raise our earnings estimates by 4% to 5% to reflect higher profit accretion from the recent formalisation of its China joint venture with Wilmar International. We now expect 3A to deliver earnings of RM34 million in FY11F and rising to RM40 million in FY12F from just RM22 million in FY10F.
The JV's 'blueprint' plant, which forms part of a broader plan to invest up to US$40 million (RM127.27 million) in F&B ingredients production in China, will have higher-than-expected production capacity of 50,000 tonne/month. When commissioned in mid-FY11F, the US$7 million maiden plant would boost the group's overall production capacity by an estimated 67% to 80,000 tonne/month.
Payback period is a short 18 months. The 'blueprint' plant is strategically located with close proximity to a cluster of Wilmar manufacturing hubs at Qinhuangdao seaport in China, giving rise to immense logistical synergies and distribution strength for 3A.
Beyond this maiden plant, a multiple plant expansion strategy is in the pipeline to leverage on Wilmar's extensive presence in China where it has at least 60 plants and a wide distribution network.
In our earnings model, we have only assumed contributions from just the maiden Chinese plant and only three product lines, versus six in its Malaysian plant. Hence, there may be further upside to our earnings estimates when 3A accelerates its Chinese plant expansion or broadens its product lines. Such a move appears likely.
Locally, expansion plans are on track to alleviate supply constraints due to lack of production capacity. With glucose and maltodextrin production currently operating at maximum threshold, earnings are set to get a boost from enlarged capacity of new glucose (+62% to 13,000 tonnes/month) and maltodextrin plants (+166% to 3,200 tonnes/month) by end-2010.
Net gearing is a healthy 20% for FY10F. Assuming the group gears up for more plants in the pipeline, net gearing is still a comfortable 40%. And, we are not unduly worried because of the short payback and the infrastructure advantages from its tie up with Wilmar.
At forward PER of 20 times currently, the valuation is not expensive given 3A's robust capacity-driven earnings growth from geographic and product line expansion, a strong franchise in maltodextrin production and a solid 'hands-on' management team. ' AmResearch Sdn Bhd
This article appeared in The Edge Financial Daily, June 22, 2010.
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