- Following our recent company visit, we re-affirm our BUY recommendation
on Three-A Resources (3A), with an unchanged fair value of RM1.50/share. Our
target PE of 20x FY13F earnings is close to the stock’s 5-year mean of 19x.
- We retain our long-term bullish conviction in 3A. The
group has exciting growth plans mapped out, backed by its highly-scalable business
model and supportive operating dynamics. A stable cost structure, steady
double-digit demand growth and a transformational rise in earnings as
underpinned by its maiden 50:50 China JV plant with associate Wilmar
International (WIL Sp Equity, Hold) are set to drive 3-year earnings CAGR of
31%.
- To be sure, the group is in the final phase to attain the
remaining certifications from the relevant authorities before embarking on full commercialisation. To recap, the group
had back in June initiated fine-tuning of machineries at its state-of-art
facility in Qinhuangdao for production of better-margin HVP (hydrolysed
vegetable protein).
- We also understand initial feedback from 3A’s marketing
drive has been encouraging – leading us to believe the maiden plant may surpass
our expectation of an 18-20 months’ payback period. This is premised on:- 1)
3A’s access to Wilmar’s wide customer base and; 2) Wilmar’s proven franchise
value with a dominant 45%-50% market share of China’s cooking oil industry.
- To underline management’s confidence, we learnt expansion
plans are in place to lift the maiden plant’s current installed capacity of 6,000
tonnes/pa to 2x the size – potentially translating into RM70-80mil additional
revenues based on our estimates. Further out, we do not rule out an accelerated
expansion phase into other locations given Wilmar’s vast geographical presence
in China with over 60 plants.
- Earnings near term will be mainly driven by its Malaysia
ops on the back of enlarged capacities from newly-installed 2nd caramel colour production line (+4,000 tonnes
or +100%). More importantly, we anticipate utilisation rate to see a gradual
uptick from the current 50% to ~75% by end-FY13F, as demand momentum and
operational efficiency kick-in. As it is, management has secured contracts with
a few multinational F&B producers – effectively minimising downside risks.
Additionally, 3A has begun construction of its 3rd maltodextrin line
for completion in Jul-Aug 2013.
- We have trimmed our FY12F EPS forecast by 14%, but our
FY13F-14F projections are maintained post adjustments from:- 1) an upward
revision to our sales volume growth assumptions, and 2) higher taxation rate of
20%-24%, from 16% previously due to absence of reinvestment allowances.
- Valuation is attractive given 3A’s solid earnings
prospects. The stock is trading at 16.5x forward earnings – well below its PE
band of 26x-42x.
Source: AmeSecurities
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