• An established regional F&B ingredients player. 3A’s (listed on ACE in Aug-02 and transferred to the Main Board in Jun-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. Exports currently account for over 30% of its revenue to more than 30 countries.

• Narrowing loses in JV with Wilmar . To recap, the relationship between 3A and Wilmar was cemented when the latter 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 also 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 i.e. Three-A (Qinhuangdao) Food Industries Co. Ltd to manufacture, process and trading of Hydrolyzed Vegetable Protein (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. 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 stands to enjoy unencumbered earnings growth by leveraging on Wilmar’s extensive presence in China.

• Undemanding valuations. At RM1.35, 3A is trading at undemanding valuations of 1.83x P/B (33% discount to peers’ 2.75x) and trailing 12.5x P/E (38% below peers’ 20.2x). Overall, the company’s growth in the mid to long term will be underpinned by (1) steady underlying demand growth in the food and beverage industry amid its strong recession-proof products (10-year revenue and PATAMI grew at strong 15% and 16% CAGR); (2) growing export markets and increased product portfolios; (3) reaping long term synergistic benefits from strategic alliance with Wilmar and (4) expanded capacity, higher economies of scale and improving production efficiency.

• Bullish saucer bottom formation to spur prices higher towards RM1.39-1.56 in the mid to long term . On the daily chart, after a long sideways consolidation, 3A share prices are poised to break the immediate resistance of RM1.39 and stage an ascending triangle breakout. This decisive breakout will spur prices higher towards RM1.46 (123.6% FP) before reaching our LT target at RM1.56 (ascending triangle breakout objective) in the medium to long term, supported by the bullish rounding bottom pattern in the weekly chart. Key supports are RM1.32 (50% FR) and RM1.29 (38.2% FR). Cut loss at RM1.26.

Source: Hong Leong Investment Bank Research - 16 Aug 2017