We came away from the recent engagement with Able Global (ABLEGLOB) management with following key takeaways: (i) the company is on the verge of obtaining export license from Mexican authority to distribute new dairy product, (ii) headwinds persist despite stabilised raw material costs, and (iii) secured the school milk program (PSS) contract in 2023. In line with our adjusted forecast earnings, we reiterate our Buy call with higher TP of RM1.55/share based on SOP valuation.

Pending for approval to export full cream dairy products.

ABLEGLOB is set to expand its presence into North America by exporting full cream milk products in collaboration with Walmart once Mexico's export license is approved. To recap, ABLEGLOB's Mexican joint venture – finalized in the fourth quarter of CY22 – has exceeded the estimated breakeven point with a c.25% utilization rate. Notably, their Mexican facility primarily produces filled milk products for distribution through Walmart Mexico, local chains, and their major partner CBZ de México. Despite an unknown approval date, we believe that the distribution of full cream dairy products in North America will drive a revenue increase of approximately USD10mn, benefiting from strong demand for such products in the region and leveraging Walmart's distribution network.

Headwinds persist despite stabilised raw material costs.

In line with the recent decline in input costs, specifically skim milk powder (SMP) and whole milk powder (WMP) by 47% and 40% respectively from the peak in 2022, we are expecting a positive impact on the company's gross profit margin. However, the improvement is likely to be tempered by surging sugar costs – one of the key ingredients in condensed milk accounting for c.50% of the F&B segmental revenue. The rise in sugar cost can be attributed to adverse global weather conditions and supply shortages stemming from decline production in India, coupled with concerns over export restrictions imposed by the Indian government.

Secured the school milk program (PSS) contract.

The company has secured a contract from the Malaysian government to provide UHT milk to eligible students during the 2023/2024 contract period. Although specific contract details and value are not disclosed, we are assuming that ABLEGLOB is poised to deliver approximately 10mn packs of UHT dairy drinks for 12-month period. This anticipated volume is expected to contribute approximately c.RM15mn to the company's revenue.

Impact

We raise our FY23/24/25 forecast earnings marginally by 3.2%/3.7%/3.6%, respectively, as reflective of: (i) easing input costs, (ii) contribution from PSS contract, and (iii) higher profit from exports due to favourable forex translation.

Valuation

Reiterate Buy on ABLEGLOB with a higher target price of RM1.55/share (from RM1.48/share) based on SOP valuation method.

Source: TA Research - 9 Aug 2023