Three-A Resources (3A) posted an improved 1QFY20 net profit of RM8.8m, up by 17.6% YoY on the back of favourable foreign exchange gains. Results were broadly in-line with our expectations, accounting for 28% of our full year forecast. We leave our earnings estimates unchanged and remain positive on 3A’s outlook given the resilient nature of the F&B industry supported by the downtrend in global tapioca prices which should lead to an uptick in margins moving forward. We reiterate our Outperform call on 3A, with an unchanged TP of RM0.95 based on a 15x PER pegged to FY20 EPS.

• 1QFY20 revenue slipped by 2% YoY to RM100.6m, mainly attributable to a decrease in sales volume in Malaysia as well as lower average selling price. Sales in Malaysia fell by 19% YoY from RM66m to RM54m. The decline in domestic sales was partially offset by the stronger sales recorded in the export market, which grew by 26% YoY from RM36.7m to RM46.4m. On a QoQ basis, revenue was lower by 11.8% due to lower quantities of products sold.

• 1QFY20 PBT surged by 27% to RM12.8m mainly due to the favourable foreign exchange gains and lower raw material costs, as reflected in the increase in PBT margins (1QFY19: 9.9% vs 1QFY20: 12.8%). Year-to-date, global tapioca prices has fallen by c.5%, which should lead to an uptick in margins moving forward. 3A’s PBT remained marginally unchanged QoQ as the lower sales volumes were partially mitigated by the favourable foreign exchange gains. Although the overall business environment remains challenging over Covid-19 pandemic, we remain positive as we expect to see improvement in margins in view of the down-cycle in global tapioca prices, on top of the group’s on-going efficiency initiatives to increase productivity and product quality.

Source: PublicInvest Research - 29 May 2020