THREE-A Resources' (3A; RM1.52) released another good set of results for the third quarter (3QFYDec09), which exceeded our expectations.

Turnover rose 17.4% year-on-year (y-o-y) to RM45.1 million in 3Q09 on the back of strengthening demand for its ingredient products.

In particular, sales were boosted by additional contributions from the company's new 7,000 tonnes per month glucose plant, which was commissioned in 4Q08, as well as higher utilisation at its maltodextrin plant. The latter is now running at full capacity compared to just about 50% capacity in the previous corresponding period due to the lack of glucose feedstock.

Operating margin too improved smartly, rising to 19.3% in 3Q09 compared to 14.2% in the previous corresponding quarter. We attribute this to a combination of factors, including higher utilisation and better product mix.

Thanks to both stronger sales and better margins, operating profit was 59.4% higher y-o-y at RM8.7 million in 3Q09. Net profit almost doubled over the same period, to RM5.9 million, helped by a lower effective tax rate.

For the first nine months of the year, 3A's net profit totalled RM13.5 million, already exceeding 2008's full-year earnings of RM12.1 million.

Barring any unforeseen events, we believe the company should be able to maintain its performance in the last quarter of the year. Rising cost of raw materials, primarily tapioca starch, may affect earnings in 4Q09. But the company is generally able to pass on higher costs to its customers, albeit with a slight lag.

Sanguine on longer-term prospects
We remain sanguine on 3A's longer-term growth prospects. The company has a well laid out strategy, which will underpin strong double-digit growth over the next few years.

Its new glucose plant is running well, with utilisation rising to about 50%-60% currently while demand for maltodextrin has been very strong. The company has already contracted a second maltodextrin plant, with capacity of 2,000 tonnes per month. Estimated to cost about RM15 million, the plant is slated for completion by 4Q2010.

We believe 3A has already lined up several big customers for the additional maltodextrin off-take. The market is still vastly untapped given that all the maltodextrin consumed in the country is imported, save for those produced by 3A. The company's products are price competitive against imports from the US and Europe while its quality is believed to be better than imports from China.

3A has also made good inroads into selling its products overseas. Exports currently account for about one-third of the company's sales.

There are plans to upgrade its recently commissioned glucose plant to produce up to 12,000 tonnes per month, depending on market demand for glucose as well as feedstock requirement from the second maltodextrin plant. Additional capital expenditure for the upgrade is estimated at only RM2 million-RM3 million.

Utilisation for the caramel colour, soya protein sauce and natural fermented vinegar plants should also continue to grow steadily going forward in line with consumption growth.

But shares appear fairly valued, for now
Net profit is estimated at RM19.1 million for 2009, up 57% y-o-y, and RM24.4 million in 2010, up by another 28%. However, following the strong price rally, the stock appears fairly valued at price-to-earnings (P/E) of 29.5 times and 23 times our estimated earnings for 2009-2010, for now.

Our forecast has not taken into account any earnings from future partnership ventures with Wilmar International pending further details. We believe discussions are ongoing between the two companies on the possibility of setting up manufacturing plants for ingredient products in China.

A tie-up will be positive for 3A given the huge potential of the Chinese market. However, the impact will likely only be felt over the longer-term given the time needed to hash out any partnership agreement, construct manufacturing facilities and secure new customers.

The soon-to-be-completed private placement exercise — 61.6 million shares priced at 75 sen per share — will raise proceeds totalling RM46 million, of which about RM20 million-RM25 million has been earmarked for use in any new overseas ventures.

Note: This report is brought to you by Asia Analytica Sdn Bhd, a licensed investment adviser. Please exercise your own judgment or seek professional advice for your specific investment needs. We are not responsible for your investment decisions. Our shareholders, directors and employees may have positions in any of the stocks mentioned.