• A leading regional F&B ingredients player with a solid track record for more than three decades. 3A’s (lis ted on ACE in Aug 02 and s uccess fully transferred to the Main Board in June 08) core products include caramel colour, glucose syrup, maltose syrup, soya protein sauce, natural fermented vinegar, distilled vinegar, rice vinegar, caramel powder, Hydrolysed Vegetable Protein (HVP) powder, soya protein sauce and Maltodextrin. These ingredients are relatively recession proof as they are crucial components for a wide cross section of F&B manufacturing processes. As all its products are HALAL certified by Islamic Development Department of Malaysia, 3A stands to benefit from the Government’s emphas is in making the country a regional food production and distribution centre, with particular emphasis on HALAL products. Exports currently accounts for over 30% of its revenue to more than 30 countries.
• Reaping huge synergistic benefits from strategic alliance with Wilmar in the long term. To recap, 3 A and Wilmar’s relationship was cemented when Wilmar bought a 16.7% equity stake for RM46m via a private share placement back in Oct 09. Wilmar is an integrated agribusiness group in Asia with operations in more than 20 countries. The group is the largest palm biodiesel manufacturer in the world, and a leading merchandiser and refiner of edible oils, oleo-chemicals, rice and flour in China.
• In May 2010, 3A and Wilmar formed a 50:50 JV, Three-A (Qinhuangdao) Food Industries Co. Ltd to manufacture, process and trading of Hydrolyzed Vegetable Protien (HVP) (in liquid and powder form) and all related by-products. Since the commencement of production in 2013, losses of the JV have been on a declining trend due to higher operational activities. 3A remains confident that the JV will achieve its optimum operating capacity and generate profits in the near future. As an intermediary ingredients manufacturer, 3A’s core products are complementary to Wilmar’s product portfolio, and it s tands to enjoy unencumbered earnings growth by leveraging on Wilmar’s extens ive pres ence in China.
• Limited downside risks. At R M1.04, 3 A is trading at P/B of 1.63x ( vs peers’ 2.07x). To recap, 3A’s 10-year revenue and PATAMI grew at 18% and 16% CAGR from 2005-2014. Overall, the company’s growth in the mid to long term will be underpinned by (i) steady underlying demand growth in the food and beverage industry amid its strong recession-proof products; (ii) growing export markets and product range; and (iii) higher economies of scale and production efficiency. The fundamental strength, improving technical readings and reputable shareholder would provide sufficient margin of safety and cushion further sharp share price decline.
• Upside bias following a downtrend line breakout. The stock moved above the short term resistance trend line and 200-d SMA (now at RM1.01) yesterday, signaling more upside ahead amid bottoming up indicators. We expect prices to break immediate resistances of RM1.09 (upper Bollinger band and 2 Dec high) and RM1.17 (4 Nov high). A decisive breakout above RM1.17 will spur prices higher to test our long term price target of RM1.23 (downtrend line breakout price objective). Key supports are RM1.01 and RM0.985 (21 Dec low). Cut loss at RM0.965.
• Attractive risk to reward ratio with 18.3% upside against 7.2% downside. All in, we see a good risk to reward ratio for investor with a theoretical entry price of RM1.04 given that the downside to the cut loss zone of RM0.965 is 7.5 sen (-7.2%) while the upside to the LT target of RM1.23 is 19 sen (+18.3%).

Source: Hong Leong Investment Bank Research - 29 Dec 2015