Investment Highlights

• We maintain BUY on Luxchem Corporation (Luxchem) with a lower fair value of RM0.61, pegged to 13x FY20F FD PE (previously RM0.64/share). We reduce our FY19F– FY21F earnings forecasts by 2-4% due to a more modest utilization assumption for its manufacturing segment.

• Luxchem’s 1QFY19 core net profit came in slightly below our expectations at RM9.8mil. The results account for 23% of our and 24% of consensus’ full-year estimates.

• 1QFY19 core net profit marginally declined by 0.3% YoY with group PBT margins fairly unchanged as a 7% decline in trading PBT that was mainly due to high competition was offset by manufacturing PBT rising by 9%. The group’s lower administrative and other operating expenses for the quarter were offset by higher finance costs associated with PT Luxchem Indonesia.
• Manufacturing PBT margins improved as the group’s unsaturated polyester resin (UPR) manufacturing arm, Luxchem Polymer Industries (LPI) benefitted from lower raw material prices and the stronger USD against MYR (+4%) as its USD-denominated exports contribute around 30% of group revenue. In 1QFY19, the average prices of butadiene, PVC resin and styrene declined by 18%, 25% and 8% respectively.
• 1QFY19 revenue rose 3% mainly due to stronger export sales that climbed 11%, particularly in Indonesia where revenue soared 35% due to additions to its product range.

• Meanwhile, Luxchem’s manufacturing arms are making progress:

i) LPI continues to operate in a highly competitive environment as it faces intense competition. LPI’s utilization rate remains unchanged at ~65% with a production capacity of 40K/MT p.a. The group plans to increase utilization by looking into new markets and working closely with its new customers.

ii) Transform Master (TMSB), Luxchem’s manufacturing arm tied to the production of latex and latex-related products, saw utilization rates improve from 65% of 17K/MT p.a. in Feb 2019 to 80% currently, achieved mainly from debottlenecking of its manufacturing processes.

• Moving forward, Luxchem will work towards increasing utilization rates and improving margins in FY19 with continued focus on growth in its export markets.

• We maintain our BUY call on Luxchem due to: i) its exposure to industries with stable and commendable growth; ii) large clientele (~1,000 customers) and wide application of its chemical products; and iii) sustained capacity expansions planned for its manufacturing segment particularly TMSB.

Source: AmInvest Research - 2 May 2019