Investment Merits

• Tapping into First Solar’s rising demand
• Record-high contract extension
• Doubling capacity to capture robust demand
• Undemanding valuation, given the strong clientele profile

Company Profile

PA Resources (PARB) has 26 years of experience in the aluminium industry, specialising in aluminium extrusion and fabrication. It handles every stage of production, from casting billets using ingots and scrap materials (upstream) to extruding aluminium profiles (midstream) and processing them in the anodising and fabrication department (downstream). PARB focuses on the solar industry, with its largest client First Solar contributing c.85% of revenue since coming on board in 2019, following a change in management that has supported the company's sustained turnaround.

Highlights

Tapping into First Solar’s rising demand. According to Wood Mackenzie, global solar PV-installed capacity is expected to more than triple in the next decade, driven by decarbonisation commitments from governments and corporations. PARB is set to benefit from the robust demand as its largest client, First Solar, has projected USD4.6bn in revenue for FY24 (+39% YoY) – driven by the growing global demand for solar energy and improved ASPs. First Solar's increasing sales volumes and plan to double its manufacturing capacity to 25GW in 2026 from 16.6GW in 2023, is expected to drive strong order inflows for PARB.

Record-high contract extension. PARB secured its fourth contract extension with First Solar in Jan 2024, worth MYR1.1bn for 1.5 years (or MYR180m/quarter) for the supply of aluminium frame parts – the previous contract was worth MYR550m for one year (or MYR137.5m/quarter). To accommodate the new contract, PARB recently expanded its production capacity from 2.8k tonnes per month to 3.2k tonnes per month in 2QFY24. Operating at full capacity, the recent contract extension should keep the company busy throughout FY24-25F.

Demand-fuelled expansion. PARB received a range of business inquiries from existing and new industries but is currently unable to accept orders due to capacity constraints. To address this, PARB has acquired an 18- acre parcel of land for the construction of a new plant that will double its capacity. The expansion will take place in three phases – with the aim to increase capacity from 3.2k tonnes per month to 7k tonnes in FY26.

This new plant will serve existing clients, while also enabling PARB to develop new products for new customers across different industries, thereby diversifying its revenue base. Additionally, margins could improve due to a better product mix and economies of scale.

Company Report Card

Results highlights. 1H24 revenue rose 2.9% YoY to MYR280.1m, attributed to an increase in customer orders. However, 1H24 GPM dipped slightly by 0.8ppts to 13.4% on lower aluminium prices, resulting in lower ASPs. Together with a higher effective tax rate of 27.4% vs the prior year's utilisation of tax loss carried forward, 1H24 core earnings fell by 28% YoY to MYR20m.

Balance sheet/cash flow. PARB has net cash of MYR40m or 2.7 sen per share as at 2QFY24. We expect the company to stay in a net cash position over FY24-26. Meanwhile, we expect ROE to increase to 15-20% in FY24-26, with an expected hike in earnings on the back of the capacity expansion.

Dividends. While PARB does not have a dividend policy, it paid a DPS of 1 sen in FY23, representing a payout ratio of 46%. However, given its ongoing expansion plans and the need for significant capex, we do not anticipate dividend payments in FY24-26.

Management. Group Managing Director Tan Sri Lau Kuan Kam is a substantial shareholder in the company. Michael Hoe, appointed as Executive Director in 2019, has led PARB to a sustained turnaround. Both are supported by the senior management team comprising individuals with outstanding professional qualifications and over 10 years of experience in their respective fields.

Investment Case

FV. Based on an ascribed P/E of 12-13x on CY25F earnings, we derive a FV range of MYR0.50–0.54. Our ascribed valuation is in line with the Bursa Malaysia Industrial Production Index reading. We like the company for its commendable track record and strong clientele profile. Our projected 3-year earnings CAGR of 29% (FY23-26F) is supported by the company's ambition to double its manufacturing capacity and ride on its clients' exposure to high-growth industries.

Key risks include delays in expansion plans, softer-than-expected sales, and the loss of key customers.

Source: RHB Securities Research - 15 May 2024