P.A. Resources Bhd (PA, 7225), the country’s leading aluminium extruders and fabricators, is well-positioned for multi-year earnings growth driven by (i) its recently secured RM1.08bn First Solar Contract; (ii) its new plant that will more than double the group’s extrusion capacity, facilitating customer and product diversification; (iii) potential margin expansion from operational efficiencies. BUY with a TP of RM0.41 based on 11x PER over FY25 EPS of 3.7sen.

PA has successfully completed its recent extrusion capacity expansion from 2,600MT to at least 3,200MT per month recently. This additional capacity will run full force come April 2024, which is timely as PA works on the latest RM1.08bn First Solar contract. As such, we are especially confident on its earnings growth for FY25. We remain optimistic on PA’s prospects given First Solar plans to double its manufacturing capacity by 2026 to address its outstanding backlog of 80GW spanning until 2030.

PA recently announced the acquisition of an 18-acre industrial land to construct a new plant that will enhance group’s capacity by >2x to 7,000MT per month. The new plant will be constructed in three phases, with Phase 1 adding 2,000MT per month. 50% of this new capacity from Phase 1 will cater for existing clients while the balance will be equally split to develop its own products and new clients. The targeted commencement timeline for the new plant is 12 – 15 months for Phase I from the date of the SPA.

Given PA’s initiatives to (i) establish a robust track record with a multinational customer; (ii) upgrade existing production lines and add new production lines over the years; (iii) construct a new plant for further expansion; we foresee possible margin expansion beyond the conservatively guided 7% at net level, simply from economies of scale. This is a very commendable margin given the nature of its manufacturing business.

PA is currently in a net cash position with RM46m and has healthy cash flow generation capabilities to fund future capital expenditure via a combination of internal funds and bank borrowing. In view of its ongoing expansion, we anticipate a net gearing ratio of 0.27x by FY25 and expect PA to pay dividends of 0.7 sen and 1.1 sen for FY24 and FY25 respectively, which translates into yields of 2.0% and 3.2%. That said, we anticipate a greater dividend payout ratio once its robust earnings outlook materializes.

Source: Rakuten Research - 6 Mar 2024

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