AN INVESTMENT IN HEXZA

 

Disclaimer

Before you continue reading this article, I feel that it is necessary to describe a bit on myself. I am not from finance background and have minimal experience in investing, and my up to date performance is 5%. Yes, it's only 5%  which is roughly 1% higher if you put your money into FD. The analysis below is simply mimicking the sifus and gurus from various resources and also copying directly from the Annual Report.  However, there is no guarantee on the accuracy and precision of the data and the valuation below.

 Despite the facts above, I will still write and publish this article. I would be more than happy to receive some feedback or different view on my analysis below and more importantly to lure some water fish into buying this stock.

Board of Directors

-Group CEO- Dr. Fong Weng Sum age 77

Join in 1982, a graduate in medicine from University of London's Guy Hospital Medical School.

-MD of Chemical Industries (Malaya) Sdn Bhd - Lee Hee Chew

graduate in Chemical Engineering from University of Bradford, UK

MD since 2011

-MD of Hexzachem Sarawak- Jimmy Leu

Bsc in USM , join in 2003

-OM of Summit Develpment Corporation - Lim Yoong Chong

Postgraduate in Civil Eng from England with 25 years of working experience in Real Estate

Board of directors are well experienced.

Company Outlook

The weakening of Ringgit poses a serious challenge as their raw materials are imported. Datuk Foong Weng Sum thinks that local raw material manufacturers should allocate greater portion of their produce to local manufacturers. (So, this implies that they can actually get their raw materials locally). Additional taxes in the form of exercise duty and GST may be imposed onto their potable alcohol.

In the coming years, Datuk Foong claims that they will focus on growth through M&A ( Merger and Acquisition) aggressively, because without growth in revenue and profit there will be no sustainability.

As per Q2-2017's Balance Sheet, Hexza definitely has sufficient financial resources for new acquisition.

Business Breakdown

Property Development

Summit Development Corporation Sdn Bhd (100%)

- Commercial Properties

- Residential Properties

Manufacturing

 Formaldehyde Resins

 Norsechem Resins Sdn Bhd (100%)

Core Customer: the plywood, particle boards, MDF (Medium Density Fibre) board, and wood panel industries.

Ceased operation during this financial year.

Hexzachem Sarawak Sdn Bhd (80%)

Core Customer: the plywood, particle boards, MDF (Medium Density Fibre) board, and wood panel industries.

Ethyl Alcohol

Chemical Industries (Malaya) Sdn Bhd (100%)

Core Customer: pharmaceutical companies, wine and beverage (soft drinks) for liquidified CO₂) bottlers, paint and consumable products manufacturers and industrial usages. 70% of our products go to the local market and 30% is allocated for exports.

Natural Vinegar

Bio-Acetic Products Sdn Bhd (100%)

Core Customers: Manufacturers that produces sauces, flavoring and other food industries.

Beverage

Hexza-Mather Sdn Bhd (100%)

- Alcohol beverage

Profitability and Growth (AR 2016)

Total Revenue: RM 141 mil

Table 1: Company breakdown (Extracted from AR 2016)

Hexza's Revenue has been very consistent for 5 years, with increasing profit margin. Plus, it has not suffered a single year of loss. Its profit has also been constantly increasing with its up to date (Q2) profit exceeded its prior years.

It has also been paying a dividend of minimum 4 cents per year which is equivalent where you put your FD.

The rise of profit are contributed from the disposal of property, plants, equipments/ non-current assets

In addition, it also lease one of its 8MW Heavy Oil Power Generation which worth US6mil to Tembusu Singapore with monthly rental of US132k (26% ROI) for a period of 10 years. This will be reflected in the FY2016.

 However, due to unforeseen circumstances, they has postponed the payment to July 2016.

Fundamental Strength Valuations / Ratios (Q2)

The group recorder a decrease in Revenue from RM36.65mil to RM26.86mill.

This is explained by the notes in the Quarter Report:

Manufacturing segment:  the exercise duty effective form 10 Oct 2016, on potable alcohol used in manufacture of locally bottled alcohol is no longer paid by distillers but instead bottlers. On top of that the exercise duty rate has almost doubled. Hence, the bottlers were seeking clarifications and had halt the bottling operations for almost 2 months. Subsequently, the bottlers resume their operation after 2 month but with a lower production level. This has directly resulted in drop of ethanol division's turnover by 55%, and decrease in sales of 23.2%.

IMO,  the demand of the potable alcohol will revert back in its upcoming quarters if not better,

As for the Resin department, turnover were dropped by 5.4% due to a drop in average selling price and cessation of manufacturing operation of its subsidiary company which was already announced previously. Hence, I believe it has already been reflected onto the current price of the share.

Comparing to the immediate preceding quarter, the profit before tax was lower at RM10.74mil, compared to RM15.47 mil previously, due to the gain of disposal of PPE/ non current assets at a sale of RM6.66mil. Current quarter revenue of RM 26 mil which is 36% lower than its immediate preceding quarter.

Table 2: Financial Value Ratios

Cash Flow

Cash flow from operating activities is RM 13.9 mil compare to around  RM7.3 mil  in preceding quarter, a rose of almost 91%. The net profits attributable to shareholders in its 6 months cumulative quarter is RM 26.313 mil

The cash generated from investing activities are mainly contributed from the disposable of PPE.

The total free cash flow for this quarter RM 23.4mil. Currently, the company is holding around RM70 mil of cash, which is equivalent to its 6 months revenue.

DCF

Table 3: DCF Analysis

Table 4: Operating Margin from previous quarters

For the financial quarter 30 Sep 2016, I have removed RM 6.6 mill from its revenue which contributed from the disposal of its non-current assets

With the current operating cost/ revenue, we can clearly see that the margin for the company has increased significantly. Well, I am no expert in this industry, so my guess is that the growing margin is due to disposal of its non profit making assets.

Conclusion

With the recovering demand for potable alcohol and  current fundamental strength of the company, I strongly believe that Hexza is worth more than its current value.

Since Hexza's products are used for timber related products (plywood, MDF, particle boards etc.), therefore the outlook of the company relies heavily upon furniture counters and its raw material cost.

However, in short terms, I remain reserve on Hexza as it is still lack of catalyst and sufficient attention, for it to realize its full potential.

Notes & Credits

There is no right or wrong in investing, the main purpose of investing is to make money. Like I mentioned earlier, I am more than happy to welcome any positive comments, arguments and feedback, and perhaps attract some water fish.