• A leading regional F&B ingredients player with a solid track record formore than three decades. 3A’s (lis ted on ACE in Aug 02 and s uccess fullytransferred 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 arerelatively recession proof as they are crucial components for a wide crosssection of F&B manufacturing processes. Exports currently account for over30% of its revenue to more than 30 countries.
• Abundant opportunities in HALAL food industry. As all its products areHALAL certified by Islamic Development Department of Malaysia, 3A stands tobenefit from the Government’s emphas is in making the country a regional foodproduction and distribution centre, especially HALAL products. The DPM AhmadZahid mentioned that local halal products would continue to command stronginterest among worldwide consumers with exports surging to RM42bn in 2015from RM38bn in 2014. DPM also added that while Asia remained Malaysia'sstrongest traditional market for halal products, the US, with 8m Muslims, andEurope, with 40m Muslims, presented vast opportunities for the market to grow.
• Reaping huge synergistic benefits from strategic alliance with Wilmar inthe long term. To recap, 3 A and Wilmar’s relations hip was cemented whenWilmar bought a 16.7% equity stake for RM46m via a private share placementback in Oct 09. Wilmar is an integrated agribusiness group in Asia withoperations in more than 20 countries. The group is the largest palm biodieselmanufacturer 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) FoodIndustries Co. Ltd to manufacture, process and trading of Hydrolyzed VegetableProtien (HVP) (in liquid and powder form) and all related by-products. Since thecommencement of production in 2013, losses of the JV have been on adeclining trend due to higher operational activities. 3A remains confident that theJV will achieve its optimum operating capacity and generate profits in the nearfuture. As an intermediary ingredients manufacturer, 3A’s core products arecomplementary to Wilmar’s product portfolio, and it s tands to enjoyunencumbered earnings growth by leveraging on Wilmar’s extens ive pres encein China.
• Limited downside risks. At RM1.05, 3A is trading at P/B of 1.64x ( vs peers’2.18x). 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 andbeverage industry amid its strong recession-proof products; (ii) growing exportmarkets and product range; and (iii) higher economies of scale and productionefficiency. The fundamental strength, improving technical readings andreputable shareholder would provide sufficient margin of safety and cushionfurther sharp share price decline.
• Poised for a triangle breakout. Yesterday, 3A rose 5% to end at RM1.05,accompanied by huge volume of 1.36m shares (+151% and 142% against 1-month and 3-month average, respectively) and closed above all key SMAs, signaling more upside ahead amid bottoming up indicators. We expect prices tobreak immediate resistances of RM1.09 (medium term downtrend line) soon. Adecisive breakout above RM1.09 will spur prices higher to test RM1.13 (61.8%FR) and our long term price target of RM1.26 (52-week high on 20 July). Keysupports are RM1.02 (20-d SMA) and RM0.99 (23.6% FR). Cut loss at RM0.97.
• Attractive risk to reward ratio with 20% upside against 7.6% downside. Allin, we see a good risk to reward ratio for investor wi th a theoretical entry price ofRM1.05 given that the downside to the cut loss zone of RM0.97 is 8 sen (-7.6%)while the upside to the LT target of RM1.26 is 21 sen (+20%).

Source: Hong Leong Investment Bank Research - 18 Feb 2016