We came away from a meeting with Able Global Berhad (AGB)’s recently with the following few key takeaways:

i) Raw Material Prices are Expected to Remain

ii) Improvements in Able Dairy Mexico in 2QFY24

iii) The Carey Island Development is Still in the Pipeline

We have raised our earnings estimates by 13.1% to 16.6% for FY24-26 after lowering the cost assumptions by 1.8% to 2.2% for the same period. Maintain BUY on AGB with a revised target price of RM2.57/share after rolling forward our SOP valuation to CY25.

Review of 1QFY24

To recap, AGB’s core net profit soared by 99.5% YoY to RM15.5mn, in tandem with revenue growth of 17.2% YoY to RM171.2mn. The commendable results were spurred by elevated sales demand from the tin manufacturing segment (+10.8% YoY) and F&B segment (+18.7% YoY).

Raw Material Prices Are Expected to Remain

The key commodity prices in the 1QFY24 mostly exhibited stable performance. Recently, milk prices have shown an upward trend over the past few months since March 2024. We consider this recovery manageable as the group retains a substantial inventory, adequate for approximately 3.5 months. Looking ahead, AGB will closely monitor milk prices and strategically procure milk powder from the spot market whenever prices are favourable to replenish depleted inventory. In 2QFY24, the prices of key materials are expected to remain stable, except for milk prices, which are anticipated to hover at slightly higher levels than in 1QFY24. No price adjustments are foreseen in the near term, given the relatively stable input costs. Consequently, we expect FY24 gross profit margin to experience a YoY improvement of 1.4%-pts to 17.9% (vs. FY23: 16.5%).

Improvements on Able Dairy Mexico in 2QFY24

The utilisation of Mexico production stood at 18% in 1QFY24, reflecting a 7%- pts decline QoQ. The lower production was mainly attributed to higher demand during Christmas sales in 4QFY23, which lead to a slowdown in topline for 1QFY24 as customers still had inventory on hand. For 2QFY24, Mexican production is expected to recover from losses, driven by repeat orders from existing customers and growing interest from new customers. Currently, the majority of revenue is generated locally, with exports primarily directed to existing customers in the US. Meanwhile, the group is also expanding its customer base to Central and South America, the Caribbean Island and Puerto Rico. Consequently, we are targeting the utilisation rate to reach approximately 40% to 45% in FY24 (vs. FY23: 20%).

The Carey Island Development Is Still in the Pipeline

AGB is currently awaiting the authorities’ final approval to commence development in Carey Island. Once approval is granted, they will initiate development of their property segment and expand dairy production. A capex of approximately RM100mn is slated for the expansion of dairy production, which includes the establishment of a new factory and the installation of new equipment. Hence, the capex is projected to take place towards the end of FY24 or the beginning of FY25. Our back-of-the-envelope calculation revealed that the net gearing in FY25 will increase to 0.5x (from 0.3x) assuming the capex is funded via borrowings.

Impact

We have revised our earnings estimates upward by 13.1% to 16.6% for FY24- 26 after reducing the cost assumptions by 1.8% to 2.2% for the same period.

Valuation

We have rolled forward our valuation to CY25 and maintained a BUY on AGB with a revised target price of RM2.57/share (previously RM1.94), based on SOP valuation.

Source: TA Research - 13 Jun 2024