Investment Highlights

• We reiterate our BUY recommendation on Luxchem Corporation (Luxchem) with a revised fair value of RM0.64 pegged to a rolled forward 13x FY20F FD PE (previously RM0.74/share). We revise our FY19F–FY20F earnings downwards by 1–4% mainly to account for expectations of lower utilization rates anticipated for its unsaturated polyester resin (UPR) manufacturing arm Luxchem Polymer Industries (LPI).

• Luxchem’s 4QFY18 core net profit came in slightly below our expectations at RM8.5mil (-8% QoQ, -1% YoY). This brings the group’s FY18 core net profit to RM37.8mil, missing 6% of ours and consensus’ full-year estimates.

• FY18 core profit declined 8% YoY despite higher revenue due to lower gross profit margins and higher other operating expenses recognized during 4QFY18. Both trading and manufacturing PBT declined 13% and 8% YoY respectively.

• On the trading side, declining raw material prices and the weaker USD against the MYR hurt trading margins. Average butadiene and styrene prices fell by 7% and 3% respectively from FY17 to FY18, translating to lower selling prices and margins for the group. Meanwhile, Luxchem’s USDdenominated exports would also be negatively impacted by a weaker USD against the MYR. The USD had declined 6% YoY against the MYR.

• On the manufacturing side, LPI’s margins continue to be squeezed amid intense competition and a slower market with a current utilization rate of 63% of the group’s 40K MT/year capacity. Note that LPI contributes a larger portion of Luxchem’s manufacturing pie compared to its Transform Master (TMSB) manufacturing arm.

• Meanwhile, Luxchem’s latex and latex-related chemicals manufacturing arm Transform Master (TMSB) has increased its capacity by 23% from producing 13.8K MT to 17K MT, with a current utilization rate of 65%. The group plans to further expand its capacity to 20K MT in the next few years, driven by growth in the glove sector. We have already factored the planned capacity expansions into our forecasts.

• FY18 revenue was up 1% YoY overall, as both trading and manufacturing revenue rose 0.3% and 14.7% respectively. When analyzing geographical segments, the 4% increase in export market revenue was contributed mainly by higher sales in Indonesia, Cambodia and Philippines. The higher export sales were able to offset the decline in local sales of 0.1% that were mainly due to lower sales from the trading segment.

• Moving ahead, Luxchem will continue to focus on growing its export markets supported by its increased production capacity in both its manufacturing arms. We reiterate our BUY recommendation on Luxchem premised upon: i) its exposure to industries with stable and commendable growth such as the glove sector; ii) large clientele (~1,000 customers) and wide application of its chemical products; and iii) capacity expansions planned for the group’s manufacturing segment particularly in TMSB for FY19 onwards driven by growth in the glove sector.

Source: AmInvest Research - 18 Feb 2019