3A: Earnings Continues To Improve

Result Update

For QE30/9/2016,3A's net profit rose 11% q-o-q or 56% y-o-y to RM10 million while revenue dropped 9% q-o-q or 3% y-o-y to RM88 million. Revenue dropped q-o-q due to lower sales. Profits improved due to higher products margins, lower losses from a jointly controlled entity and higher forex gain.


Table 1: 3A's last 10 quarters' P&L


Graph 1: 3A's last 13 quarters' P&L

Financial Position

As at 30/9/2016, 3A's financial position is deemed satisfactory. Its current ratio stood at a high of 7.4x while its total liabilities to equity was only 0.2x.

Valuation

3A (closed at RM1.24 yesterday) is now trading at a PER of 17x (based on last 4 quarters' EPS of 7.4 sen). While its PER is deemed high for a small-cap stock, its high valuation can be justified based on the industry exposure (the F&B sector) and healthy earning growth (of 32% over the last 2 years). That high growth would give the stock an attractive PEG ratio of 0.5x.

Other Development

In October, Securities Commission Malaysia (SC) charged six individuals with insider trading offences under Section 188 of the Capital Market and Services Act 2007 (CMSA). Among those charged are:

• Fang Chew Ham, 69, the founder and Managing Director of 3A
• Executive Director Fang Siew Yee, 36, and
• Non-executive Director Fong Chiew Hean

The offence under section 188(3)(a) CMSA was allegedly to have been committed on 5 September 2009.

The offense is a negative development for the group. On the other hand, if this leads to the Fang family giving up control of 3A by disposal to the next major shareholder, Wilmar, this could lead to a more rapid growth for the group.

Technical Outlook

Over the past 2 years, 3A has risen gradual from RM0.85 in January 2015 to a high of RM1.45 in June 2016. Now it has slid back towards its "uptrend line", SS with support at RM1.15.


Chart 1: 3A's monthly chart as at Nov 15, 2016 (Source: Shareinvestor.com)

3A may be coming out of a 5-year rounding bottom formation. The gradual rise may send the stock to test its previous high of RM2.20. A breakout above this level could be followed by a strong rally akin to the rally of 2009. Let's wait and see.


Chart 2: 3A's monthly chart as at Nov 15, 2016 (Source: Shareinvestor.com) 

Conclusion

Based on good financial performance and position, reasonable valuation and mildly bullish technical outlook, 3A is a very good stock to consider for long-term investment.

Note:

I hereby confirm that I do not have any direct interest in the security or securities mentioned in this post. However, I could have an indirect interest in the security or securities mentioned as some of my clients may have an interest in the acquisition or disposal of the aforementioned security or securities. As investor, you should fully research any security before making an investment decision.