Three-A Resources - Turnaround on a solid footing

We maintain our BUY recommendation 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. Our fair value is based on a fair PE of 21x FY13F revised earnings, close to the stock’s historical mean of 20x.

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

FY11’s net profit fell 6% despite a higher turnover which was up 8% YoY. Though the sales volume increased on the back of higher consumer demand for the group’s core products, these were more than offset by pricier raw 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 quarters since the bottoming back in 1QFY11. The improved performance in 4Q was largely attributable to a 1.4ppt-QoQ margin expansion to 9% arising from lower raw material costs, namely that of tapioca starch. 

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

The group booked lower losses of RM0.1mil for its multistorey US$7mil JV manufacturing plant in China (3QFY11: - RM0.2mil) due to operational start-up costs and early stage investments. Higher utilisation rates and better economies of scale should underpin gradual improvements in the following quarters.     

All in, we have trimmed our FY12F-13F earnings forecasts by 8%-22% after taking into account revised utilisation rates and margin assumptions. We now expect a net profit of RM27mil for FY12F, with earnings buoyed by top line growth and further margin expansion. We continue to like the group for its transformational earnings growth as driven by geographic and product line expansion, a strong franchise in maltodextrin and a ‘hands-on’ management.

Source: AmeSecurities