Investment Highlights

• We downgrade our BUY recommendation to HOLD on Luxchem Corporation (Luxchem) with lower forecasts and lower fair value of RM0.53/share (vs. RM0.64/share previously), pegged to an FY20F FD PE of 13x.

• Luxchem’s 3QFY19 results came in beneath our expectations at RM8.9mil, bringing 9MFY19 results to RM28.1mil. The results account for 69% of our full-year forecasts and consensus’ full-year estimates.

• 9MFY19 core profit slid by 4% due to lower local sales and deteriorated trading and manufacturing margins. Margins were squeezed despite the USD strengthening against the MYR by 4% YoY which would have benefited Luxchem due to 30% of its exports being USDdenominated. However, the margins were dragged by lower average selling prices of chemicals which brought down sales.

• Meanwhile, Luxchem’s 9MFY19 revenue decreased by 5% as export sales rose by 4% while local sales fell by 8%. Indonesia remains the group’s largest export market, growing 12% YoY.

• On a quarterly basis, 3QFY19 core profit and revenue declined by 6% and 1% QoQ respectively due to margin compressions in both the trading and manufacturing segments as aforementioned.

• Update on the progress of its manufacturing arms:

i) Luxchem Polymer Industries (LPI) in the unsaturated polyester resin (UPR) industry: Competition is still a main concern for this industry, with utilization rates still unchanged at around 70% of LPI’s 40K MT p.a. capacity.

ii) Transform Master (TMSB) in the latex industry: The production is operating at nearly full utilization rate with capacity remaining at 13.8K MT p.a. The group’s plan to increase TMSB’s capacity to 18K MT p.a. by 3QFY19 has been delayed due to warehouse and labour constraints, with expansions slated to be completed by the end of 2019.

• Luxchem is in a net cash position of RM118mil with no borrowings and net assets per share of RM0.29. Moving forward, 4QFY19 is expected to be flattish while for 2020, the group intends to continue its strategy of export-led growth and focus on improving margins by increasing the utilization rates and efficiencies of its manufacturing arms, LPI and TMSB.

• We are cautious on Luxchem due to: i) challenging market conditions despite its exposure to the glove sector that has commendable growth prospects, ii) deteriorating margins in its UPR manufacturing arm, LPI as it continues to face intense competition. This is despite Luxchem’s large clientele of ~1K customers and wide application of its chemical products, and also its sustained capacity expansions planned for its manufacturing segment, particularly that of its latexrelated arm TMSB.

Source: AmInvest Research - 25 Oct 2019