Three-A Resources - All ready to feast in China BUY

Stock Name: 3A
Company Name: THREE-A RESOURCES BHD

Research House: AMMB

Price Call: BUY

Target Price: 1.70

- We re-iterate our BUY recommendation on Three-A Resources(3A) but clip our fair value from RM1.70/share to RM1.50/share, based on atarget PE of 20x FY13F revised earnings as we impute in a more conservative utilisationrates based on progressive earnings contributions from 3A's maiden China plant.Our target PE is close to China consumer peers' average of 18x. 

- Following a recent meeting with management, our longtermconviction in 3A is reinforced ' its structural transformational growth isfirmly on track. We understand commercial production of its 'blueprint'manufacturing hub in Qinhuangdao, China, is scheduled to kick-off this June. 

- The group is in the midst of fine-tuning its machineriesat the state-of-art facility which boasts 13,600m'' total floor area. Aspresent, installed HVP production line with a capacity of 6,000MT p.a. isalready more than 3x the size for equivalent produce in Malaysia. To underlineour growing confidence, expansion plans for an additional 6,000MT (+100%) hasalready been targeted for completion by end-FY13F.   

- More importantly, produce in China is expected to yield highermargins due to:- 

1) A strong focus on higher value products such as HVPpowder (hydrolysed vegetable protein) vs. HVP liquid and; 

2) Absence of quality competition within the local market. 

- Contrary to perception, most local producers operate on amuch smaller scale, while a few bigger ones lack international accreditation.In contrast, 3A adheres to European standards, and hence, is expected to enjoy betterpricing power.

- We estimate earnings contributions from the China plant torise from 5% in FY12F to 23% next year, with FY13F being the inflexion point.Earnings near term will remain predominantly Malaysia-driven, given enlargedcapacities from the 2^nd  caramel colour plant (+4,000MT or 100%) and anaverage utilisation rate of ~70%. 

- Valuation is attractive and the current weakness in share priceis an excellent opportunity to accumulate the stock. As it is, 3A's forward PERof 15x is at a deep 20% discount to the stock's 5-year mean of 19x. Further, wesee material upside to our earnings forecast from the potential expansion toother geographical locations in China

Source: AmeSecurites 

Three-A Resources - Turnaround on a solid footing

Stock Name: 3A
Company Name: THREE-A RESOURCES BHD

Research House: AMMB

Price Call: BUY

Target Price: 1.70

We maintain our BUYrecommendation on Three-A Resources (3A), with a slightly lower fair value of RM1.70/share vs.RM1.83/share previously, as we roll forward our valuation base to FY13F. Ourfair value is based on a fair PE of 21x FY13F revised earnings, close to thestock's historical mean of 20x.

3A posted a lower net profit of RM16mil for FY11, coming inbelow our full-year forecast and consensus by 10% ' the variance stemming froma lower-than-expected top line growth. Notwithstanding this, 3A's long-termgrowth remains intact ' underpinned by its JV with Wilmar International (WIL SpEquity) in China.

FY11's net profit fell 6% despite a higher turnover which wasup 8% YoY. Though the sales volume increased on the back of higher consumerdemand for the group's core products, these were more than offset by pricierraw material costs which resulted in a 2.9ppt-EBITDA margin compression.

On a sequential basis, 4Q net profit jumped 66% to RM5mil.We observed the continued EBIT margin expansion over the past three quarterssince the bottoming back in 1QFY11. The improved performance in 4Q was largelyattributable to a 1.4ppt-QoQ margin expansion to 9% arising from lower rawmaterial costs, namely that of tapioca starch. 

Tapioca starch has softened since mid-2011, with the currentprice now 23% lower from the peaks back in June 2011. As such, we would expectthe impact from volatile raw material costs to be less subdued going forward.

The group booked lower losses of RM0.1mil for itsmultistorey US$7mil JV manufacturing plant in China (3QFY11: - RM0.2mil) due tooperational start-up costs and early stage investments. Higher utilisationrates and better economies of scale should underpin gradual improvements in thefollowing quarters.     

All in, we have trimmed our FY12F-13F earnings forecasts by8%-22% after taking into account revised utilisation rates and marginassumptions. We now expect a net profit of RM27mil for FY12F, with earningsbuoyed by top line growth and further margin expansion. We continue to like thegroup for its transformational earnings growth as driven by geographic andproduct line expansion, a strong franchise in maltodextrin and a 'hands-on'management.

Source: AmeSecurities 

Margin expansion at Three-A Resources to accelerate

Stock Name: 3A
Company Name: THREE-A RESOURCES BHD

Research House: AMMB

Price Call: BUY

Target Price: 1.83

Three-A Resources Bhd
(Nov 17, RM1.17)
Maintain buy at RM1.18 with revised fair value of RM1.83 (from RM2.13): Three-A Resources (3A) posted a higher net profit of RM14 million (year-on-year [y-o-y]: 4%) for 9MFY11. Earnings for the nine months came in at the low end of our full-year forecast and consensus estimate at 65%, with the variance mainly due to softer than expected top line growth. We have trimmed our FY11F to FY13F earnings by 10% to 12%. Despite our revisions, our earnings model indicates a strong three-year compounded annual growth rate of 35%. We are now projecting FY11F net profit of RM18 million to grow 63% to RM30 million for FY12F, and a further 43% to RM42 million the year after.

On a sequential basis, 3Q performance was impacted by lower revenue which contracted 11% due to softer demand, and partially offset by a margin expansion of 2.9 percentage points. While net profit declined 34% to RM3 million, we remain encouraged by the group's continued margin recovery on the back of cheaper raw materials. We expect margin revival to gain further traction as cheaper costs filter through in the quarters ahead.

As it is, key input cost of tapioca starch (Thai) is trading at US$460 (RM1,454) per tonne, 19% off its year-to-date peak in June. Tapioca starch constitutes 40% to 50% of total raw materials.

We remain positive about 3A's prospects. Its capacity driven earnings growth is well underpinned by stable demand and margin recovery.

More importantly, 3A's long-term growth and transformational earnings are on track, with its maiden China joint venture plant with Wilmar International on schedule for operational commencement by end-FY11F.

We maintain 'buy' on 3A with a revised fair value of RM1.83 per share (previously RM2.13), based on a fair price-earnings ratio (PER) of 24 times FY12F earnings. Valuation is cheap at the present level, with forward PER of 15 times at a steep discount to its three-year historical average of 26 times. ' AmResearch, Nov 17


This article appeared in The Edge Financial Daily, November 18, 2011.

Margin revival in consumer sector

Stock Name: 3A
Company Name: THREE-A RESOURCES BHD

Research House: AMMB

Price Call: BUY

Target Price: 2.13

Consumer sector
We have turned more constructive on the consumer sector, in particular on selected food and beverage (F&B) companies within our consumer universe. We believe peaking inflation with softening commodity prices are strong drivers for potential earnings upside of consumer stocks from 2H11 onwards.

An absence of intensified worries over high inflation and higher disposable income should provide support to increased consumption levels. While consumption of consumer goods and services are relatively more resilient compared with other industries, easing inflationary pressures could be a further boost to top line growth of consumer companies. Our in-house economist forecasts July inflation rate to inch up further from June's 3.5% year-on-year'' (a 27-month high) due to the upward adjustments in energy tariffs, before retreating.

In addition to the confluence of structural and cyclical issues, we observe that most global commodity prices have fallen off their peaks on weak recovery in the developed world and slower growth in emerging markets. China, the world's largest importer of various commodities, recently posted a slower GDP of 9.5% for 2Q, against 9.7% in the previous quarter. Should most commodity prices see a notable slowdown towards end-2011, and as raised average selling prices (ASPs) are sustained, we see room for margin expansion on the back of lower input costs. With the exception of sugar and milk, other key input costs such as corn, wheat, cocoa and tapioca starch are trending downwards, 5% to 19% off year-to-date (YTD) peaks.

Across our coverage of consumer stocks, large caps with pricing power and market share leadership have largely outperformed the market by +6% at +27% YTD.

Smaller and medium-sized caps on the other hand were down by as much as 21% in the same period, mainly due to margin compression as a result of high raw materials prices. In this current environment, we prefer staples over discretionaries. Smaller and medium-sized F&B manufacturers are likely to see higher earnings upside potential arising from margin expansion.

Our top 'buys' are Three-A Resources Bhd (3A) and Cocoaland Holdings Bhd as gross margins for both stocks have been hard hit in the past few quarters. Margin expansion should therefore be stronger. Raw materials dominate the bulk of operating costs at 40% to 50% on average. We like 3A for its long-term earnings transformational growth as underpinned by product and capacity expansion from its China joint venture with Wilmar International. We also like Cocoaland for its aggressive but well-defined capacity expansion plans in gummies and high-growth PET 'hot-filling' technology within the beverages industry.

Potential beneficiaries of a lower cost structure include F&B giant Fraser & Neave Holdings Bhd (F&N) and KFC Holdings Bhd (KFCH) for their superior pricing power and focus in niche markets. Stabilising malting barley and hops in 2H11 ' key inputs for brewers ' may also partially offset the price surge effects seen in 1H. Depending on the magnitude, this could potentially translate into better than expected margins in 2012 for Carlsberg Brewery and Guinness Anchor Bhd. ' AmResearch, Aug 1


This article appeared in The Edge Financial Daily, August 2, 2011.