We came away from Able Global Berhad (AGB)’s virtual investor briefing feeling cautious on the group’s near-term prospects, as we think that the group’s profit margin remains under pressure given the elevated raw material costs. As a result, we are adjusting our FY22-24F earnings forecast downwards by 3-10% due to higher input cost assumptions. However, we remain optimistic on the group’s long-term outlook, driven by strong demand for dairy products globally, greater contribution from its Mexico JV and new product launches. Our Outperform call is maintained with a lower SOP based TP of RM1.75 (from RM2.00) following our earnings adjustment.

• Margins likely to remain under pressure. We remain wary on AGB’s profit margins in the near-term, as commodity prices have risen sharply due to the global supply chain disruptions as well as the uncertainties caused by the Ukraine Russia conflict. Global prices for milk powder and sugar have increased by c.36% and 18% YoY respectively. While we understand that it has become easier for AGB to adjust its selling price to its customers but the gradual increase is unable to fully cushion the impact of a sudden spike in raw material prices. Nevertheless, we are expecting margins to normalize once disruptions in the supply chain have eased.

• Mexico JV updates. There has been a slight delay in obtaining the licensing for exports, resulting in a low utilisation rate (c.10%) from its Mexican operations. The group is still in the midst of completing the audit process by Mexico’s Ministry of Health and Walmart. AGB targets to secure the audit approval to supply to Walmart by 1QCY22. We believe that once AGB has obtained the necessary approvals, the group will be able to ramp up its production, thereby achieving management’s target to breakeven (c.20% utilisation) in the first year of operations as demand for dairy products from potential markets has been encouraging.

• Anticipating higher utilisation going forward. AGB recorded a lower utilisation at 51% in FY21 (FY20: 57%), mainly dragged by the Covid- 19 related restrictions and a temporary halt in operations due to the flood in Dec 2021. We understand that operations from the Klang factory were affected for 12 days. As we do not expect the government to reintroduce strict lockdown measures going forward, this should enable the group to ramp up its production, translating to a potential improvement in margins from greater economies of scale.

Source: PublicInvest Research - 15 Mar 2022