Investment Highlights

• We maintain our BUY recommendation on Luxchem Corporation (Luxchem) with unchanged forecasts and fair value of RM0.61/share, pegged to an FY20F FD PE of 13x.

• Luxchem’s 2QFY19 results came in line with our expectations at RM9.5mil, bringing 1HFY19 results to RM19.2mil after excluding one-off net positive gains on forex and derivatives of RM0.4mil. The results account for 47% of ours and consensus’ full-year estimates.

• Despite 1HFY19 results being below the 3-year average of 50% of full-year estimates, we consider the results to be in line as we note that 2QFY19 was impacted by festive seasons which affected the performance of Luxchem’s largest export market, Indonesia, as well as the local market. As such, the quarter ahead is expected to be better than 2QFY19 without this effect causing a slight drag on group performance.

• 1HFY19 core profit declined 4% YoY despite net profit improving marginally by 0.6%, after excluding 1HFY19’s aforementioned one-off net gain vs. 1HFY18’s one-off net forex loss. Luxchem’s group PBT rose 1% due to a 6% improvement in manufacturing PBT offsetting a decline in trading PBT of 4%. The improvement in manufacturing PBT margin was mainly attributed to better utilization of the group’s latex and latexrelated manufacturing arm Transform Master (TMSB) while trading PBT margins were slightly dragged by lower local sales.

• Luxchem 1HFY19 revenue slid 1% as stronger export sales that went up 10% were unable to offset the decline in local sales of 5%. Revenue for Indonesia grew 22% due to additions in its product range.

• As for the progress of the group’s manufacturing arms, its unsaturated polyester resin (UPR) manufacturing arm, Luxchem Polymer Industries (LPI) continues to run at a suboptimal utilization rate of 65–70% of its 40K MT p.a. capacity due to the highly competitive environment. On the other hand, TMSB continued to show positive performance as its utilization rate of 80% of 13.8K MT p.a. in early May 2019 has improved to its current utilization rate of 87%. The group plans to bump up TMSB’s capacity to 18K MT p.a. by 3QFY19.
• Moving forward, the group will continue to focus on increasing margins by improving the utilization rates of its manufacturing arms through its export-focused growth strategy.
• We continue to like Luxchem due to: i) its exposure to industries with stable and commendable growth prospects such as the glove sector, ii) its large clientele (~1K customers) and wide application of its chemical products, and iii) its sustained capacity expansions planned for its manufacturing segment, particularly that of TMSB.

Source: AmInvest Research - 31 Jul 2019