Three-A Resources - Earnings kicker from China plant on track Buy

- Three-A Resources (3A) made a soft start into FY12F with a net profit of RM4mil for 1Q. Results accounted for only 18% of our full year forecast, but we deem it to be broadly in line to expectation on back of rising earnings from enlarged capacity moving forward.

- On a sequential basis, 1Q turnover was up an encouraging 10% mainly due to higher demand for core products of maltodextrin, hydrolyzed vegetable protein (HVP) as well as caramel colour.  

- Despite this, earnings fell 22% QoQ to RM4mil. This was mainly attributable to:- 1) sequentially higher raw material prices resulting in a slight margin compression of 1.8ppts and; 2) a higher effective tax rate (QoQ: +2ppts to 20%).

- Compared to the same quarter in the preceding year, 1Q pretax profit grew from RM2mil to RM5mil largely on back of:- 1) a higher sales volume due to increased demand and; 2) EBIT margin expansion due to overall YoY decline in input costs.

- Admittedly, 1Q performance could have been stronger, but we are unduly concerned. More importantly, 3A’s long term structural transformation growth remains intact. Its maiden manufacturing facility in Qinhuangdao, China is on track for commercialisation in June 2012. As it is, the group is already in the midst of fine-tuning its machineries.

- We maintain our BUY rating with an unchanged fair value of RM1.50/share based on a target PE of 20x FY13F earnings. 

- Valuation remains attractive, with 3A’s forward PE of 15x currently at a deep 20% discount to the stock’s 5-year mean of 19x. Our target PE is close to selected China consumer peers’ average of 18x.

- Major catalyst for a re-rating includes potential future expansions into other geographical locations in China.   

Source: AmeSecurities