Investment Merits

• Margin recovery for both business divisions from easing input costs
• Progressively increasing contributions from Mexico operations
• Capacity expansion to capture robust demand and lift efficiency levels
• Trading at attractive valuations, offering decent dividend yields

Company Profile

Listed on Bursa Malaysia in 2003, Able Global (ABLE) started off as a tin can manufacturer. Subsequently, the group ventured into the F&B business via the acquisition of a dairy product manufacturing company. In a major strategic move, it acquired c.298 acres of freehold land in Kuala Langat, Selangor in Jun 2021 to expand its manufacturing operations, as well as undertake industrial property development activities.

For the tin can segment, most of ABLE’s customers are based in Malaysia, but it also has a small market share in Singapore. Customers are from various industries – mainly biscuit makers, as well as paint and chemical, edible oil, and food processing firms. In the F&B segment, its dairy products are mainly exported – mostly to West Africa, within South-East Asia, as well as to North and South America. The dairy products comprise sweetened condensed milk, evaporated milk, as well as milk powder packed in both bulk and consumer formats. As of FY23, F&B accounted for three quarters of the group’s PBT, while the rest was from its tin can manufacturing business.

Highlights

Cost tailwinds to propel margin recovery. Input costs for the F&B division should ease following the retreat in key commodity prices including that of milk powder and sugar, which account for 25-35% and 30% of the F&B segment’s operating costs. Similarly, lower steel prices are expected to boost its tin can manufacturing business, after demand was affected in FY23 due to high ASPs. Considering the robust demand for dairy products and volume recovery in the tin can business, we expect benign margin expansion for both business divisions going forward.

Gestation period over in Mexico, volumes to be ramped up further. After commencing commercial production in its Mexico operations (43%- owned associate) in FY22, the unit achieved an earnings turnaround in FY23. Utilisation rates at its Mexico facilities improved to 25-30% towards end-FY23, and management is aiming to improve this further, supported by recurring orders from existing customers and deeper market penetration by securing new customers. We believe the longerterm potential of ABLE’s Mexico venture is tremendous, considering the huge market size and demand in the region.

Laying the groundwork for future growth. ABLE purchased c.298 acres of land in Kuala Langat, Selangor for MYR169.8m in 2021. The land will be developed as Able Bizpark @ Carey Island with an estimated GDV of MYR1bn. We understand that one-third of the space will be taken up by ABLE for capacity expansion, to consolidate its F&B operations and double its existing capacity. This also allows ABLE to expand its product range. The new lines should improve operational efficiency, as well. Meanwhile, the remaining land will be sold to capture the demand for industrial properties.

Company Report Card

Results highlights. FY23 net profit surged 58% to MYR52m on the back of a robust topline growth of 18% to MYR648m. This was primarily spurred by a sharp margin expansion in its F&B business, thanks to an increase in volumes on robust demand, as well as the turnaround of its Mexico operations. This more than offset the softness in the tin manufacturing division which was dragged by soft customer demand.

Net gearing at a manageable level. As of FY23, ABLE’s net gearing stood at 0.3x, which gives it room to gear up if necessary, and in view of its strong cash flow generation (operating cash flow was MYR88m in FY23).

Dividends. While it does not have a dividend policy, ABLE has been consistently paying dividends on a quarterly basis. The payout ratios ranged between 37% and 48% in recent years, and we believe this will continue going forward, considering the cash flow generation and balance sheet strength.

Management. CEO Edward Goh Swee Wang has more than 20 years of experience in the tin can industry. He oversees the planning, development, marketing, and overall management of the company. Group Chairman and Executive Director Ng Keng Hoe is another key management team member who co-manages the F&B business.

Investment Case

Attractive valuation. ABLE is trading at 10x FY23 P/E. We believe its valuation is undemanding, but unwarranted – in view of the solid company fundamentals and sticky demand for its F&B products. We highlight that ABLE managed to maintain its profitability and dividend payouts throughout the COVID-19 pandemic. By estimating 10-15% earnings growth in FY24 and ascribing a P/E of 12x (20% discount to another small-cap FMCG company under our coverage, given ABLE’s exposure to the non-F&B business), the fair value range for ABLE is estimated at MYR2.20-2.32. Assuming a dividend payout ratio of 40%, this translates to a prospective yield of 4.3-4.5%.

Key risks include a sharp rise in input costs and failure to secure new customers for its Mexico plants.

Source: RHB Securities Research - 15 May 2024