• An established F&B ingredients player. 3A’s 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. In FY17, exports accounted for ~38% of its revenue to more than 30 countries. To recap, 3A’s 10-year revenue and PATAMI grew at 11% and 14% CAGR, respectively.

• Undemanding valuation. At RM1.03, 3A is trading at undemanding valuations of 13.2x (12.6x if ex-cash of 5.6sen) FY18 P/E (~21% below its peers), supported by a steady 9% FY18-20 EPS CAGR.

• Positive disposal of JV Co in China. Given the China exit by end 2017, 3A’s growth in the coming years will be underpinned by lower raw material prices (amid firmer ringgit), steady underlying demand growth in the F&B industry amid its strong recession-proof products, growing export markets and leveraging on the expansion of production facilities of its completed Maltodextrin Plant 3 and increased product portfolios. We view the recent disposal of its JV Co in China is positive to the group as it allows 3A to relieve itself from possible incurrence of further losses in addition to redirecting capital expenditure commitments to other rewarding investments.
• More upside in anticipation of a triangle breakout. Since hitting 52- week low at RM0.93 (9 Feb), 3A has been building a base above the support trend line before ending at RM1.03 yesterday. We expect prices to stage a triangle breakout in the short term. A decisive break above RM1.05 (downtrend line) will spur prices higher to RM1.13 (200d SMA) before reaching our long term price target of RM1.23 (61.8% FR). Key supports are RM1.00 and RM0.98 (4 Apr low). Cut loss at RM0.945.

Source: Hong Leong Investment Bank Research - 20 Apr 2018