This article first appeared in The Edge Financial Daily on February 22, 2018

Three-A Resources Bhd
(Feb 21, RM1.10)
Upgrade to outperform with a target price (TP) of RM1.17: Three-A Resources Bhd (3A) ended financial year 2017 (FY17) on a high note, as its fourth quarter of FY17 (4QFY17) net profit grew 8.3% year-on-year (y-o-y) to RM14 million, bringing 3A’s FY17 net profit to RM41.6 million, up 7% y-o-y. 3A’s FY17 net profit exceeded our expectations by 8.7%, primarily attributed to stronger sales and favourable raw material costs. We upgrade our call to “outperform” in view of its current share price weakness, which implies an attractive upside potential for our 12-month TP of RM1.17, based on 15 times FY18 earnings per share.

A higher 4QFY17 revenue (+15.1% y-o-y) was reported on the back of a higher sales volume across its geographical markets. For FY17, 3A’s group sales grew by 6.1% y-o-y, as “other countries” sales jumped 30.1% compared with FY16. Malaysian sales were flat at -0.2%, while Singapore’s was slower at -7.3%. We are conservatively looking at a 4% to 6% growth for FY18 to FY20, on the back of an overall diversity in product offerings and continuous investment in capacity expansion plans. As an ingredient producer, 3A would benefit from steady growth in the food and beverage (F&B) industry, acting as a feeder to the industry with its products being widely used in food processing, in forms of raw materials or semi-finished goods needed for other food manufacturers to produce their finished goods.

Net profit for 4QFY17 and cumulative FY17 both increased in tandem with revenue growth. Operating, pre-tax and net margins for FY17 were consistent at 14.6%, 13.6% and 10.1% respectively (compared with 15.6%, 13.8% and 10% for FY16). 3A’s increasing focus on higher-margin products in addition to new product developments will continue to support margin levels.

We believe the recent slump in share price has deemed 3A attractive. We think further weakness in 3A’s share price is not justified as the group’s fundamentals remain intact. On top of that, the recent disposal of its joint venture in China is positive for 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. We view 3A’s weak share price as an opportunity to accumulate. — PublicInvest Research, Feb 21