Investment Highlights

• We raise our FY20F net profit forecast by 6% and FV by 6% to RM0.56 (from RM0.53) based on 13x revised FD FY20F EPS. The earnings upgrade is to reflect higher demand for chemicals used in the manufacture of gloves on the back of the Covid-19 outbreak. Typically, glove-related sales make up ~35% of Luxchem’s total turnover. Maintain HOLD.

• Luxchem’s FY19 results met our forecast and consensus estimates.

• FY19’s turnover shrank 6% YoY as export sales fell by 8% YoY due to intensified competition in the export market, coupled with slowing demand for chemical products amidst a global economic slowdown.

• However, core profit only eased by 1% YoY mainly due to better margins in construction-related products such as unsaturated polyester resin (UPR), paint/coating, PVC, etc., we believe, on the pick-up of construction activities locally. We estimate that construction-related sales make up ~40% of Luxchem’s total turnover.

• Key highlights from the briefing yesterday are:

1. Luxchem has seen higher demand for its glove-related products recently due to the Covid-19 outbreak. This is timely as it has just expanded its latex manufacturing arm’s (TMSB) capacity by 30% to 18K MT in 4QFY19 from 13.8K MT. The company foresees the utilization rate of TMSB reaching close to full capacity by the end of 2020.

2. The company has yet to encounter any supply chain issues as a result of the Covid-19 outbreak. However, Luxchem is mindful of a potential disruption if the situation persists as it sources a substantial portion of its inputs from China.

3. There was a one-off impairment of around RM700K in 4QFY19 for a fire incident at TMSB which happened in December 2019. The fire has not disrupted TMSB’s operations while the damage is adequately covered by insurance (and hence, there should be a reversal for the impairment in FY20F.

• Meanwhile, Luxchem continues to pursue export-led growth (particularly in Vietnam and Indonesia) and focus on improving margins by increasing the utilization rates and efficiencies of its manufacturing arms (LPI and TMSB).

• We continue to like Luxchem for its large and diversified clientele (about 1,000) and wide application of its chemical products, and also its sustained capacity expansions planned for its manufacturing segment, particularly that of its latex-related arm TMSB. However, valuations have become rich after the recent run-up in its share price on the back of the Covid-19 outbreak.

Source: AmInvest Research - 18 Feb 2020