Despite near term challenging outlook, we still like 3A for the robust sales of its resilient F&B ingredients, healthy balance sheet (with RM22m net cash), as well as proven track record that is supported by strong brand equity of its products both domestically and in export markets. Valuation is undemanding at 12.8x FY19E P/E (12.2x if ex-cash of RM22m or 4.5sen/share), a 21% discount below its peers, supported by a strong 14% FY18-20 EPS CAGR. More upside towards RM1.10-1.22, pending a downtrend line breakout soon.

A reputable 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. All ingredients are Halal and Kosher certified. 3A is relatively protected from the vagaries of demand brought upon by shifts in consumer preference for a particular brand 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. Meanwhile, 3A’s 10-year revenue and PATAMI grew at 11% and 14% CAGR to RM411m and RM40m, respectively.

Disposal of JV Co in China completed in Feb 2018. Given the China exit in Feb 2018 (via the disposal of 50% interest in a joint venture company, Three-A (Qinghuangdao) Food Industries Co. Ltd), 3A is able to realign its resources and concentrate on carrying out the Group’s business in Malaysia.

Challenging time in FY18 but earnings should pick up in FY19-20. At RM0.98, the stock is trading at undemanding 12.8x FY19E P/E (12.2x if ex-cash of RM22m or 4.5sen/share), a 21% discount below its peers. Despite anticipating a 4.4% revenue growth in FY18, 3A’s bottom line is expected to drop by 19% amid weakening margins due to the unfavourable raw material prices and currency rates, coupled with higher operational overheads. Although we remain cautious over FY18 outlook, we see better prospects ahead for FY19-20, with FY18-20 EPS set to grow at 14% CAGR, underpinned by rising economies of scales due to ramp-up in its newly completed Maltodextrin Plant 3, continuous efforts in production efficiency and automation initiatives, gaining confidence from large MNCs within the industry in supplying quality products at competitive prices, capacity expansion plans (with another new Caramel Powder Plant is due for completion by the end 2019), alternative raw materials sourcing, inreased penetration of export markets and diversity in product offerings through continuous emphasis on R&D initiatives.

More upside in anticipation of a downtrend line breakout. Since hitting 52-week low at RM0.91 (30 May), 3A has been building a base above the 10d/30d SMAs (near RM0.94) before ending at RM0.975 yesterday. We expect prices to stage a downtrend line resistance (near RM1.03) in the short term. A successful breakout will spur prices higher to RM1.10 (38.2% FR) before reaching our long term price target of RM1.22 (61.8% FR). Key supports are RM0.94 and RM0.91. Cut loss at RM0.89.

Source: Hong Leong Investment Bank Research - 30 Jul 2018