Investment Highlights

• We cut our FY20–22F net profit forecast by 8%, 10% and 8% respectively, and reduce our FV by 14% to RM0.48 based on 11.5x revised FY21F EPS (from RM0.56 based on 13x FY20F EPS previously). Maintain HOLD.

• The earnings downgrade is to reflect a weaker demand for chemicals as certain customers (especially those in the construction, automobile and electrical segments) shut down or operate at reduced capacity during the monthlong movement control order (MCO. The downgrade in multiple (about 10% to its historical average forward P/E) is to reflect a higher market risk premium as the global economy moves closer to a severe downturn with countries around the world imposing lockdowns amidst the unabated Covid-19 pandemic.

• We understand that Luxchem's latex processing/compounding arm Transform Master is operating at reduced capacity during the MCO period. Despite falling under the "essential goods" category, we understand that there are still certain operational restrictions. Also, the MCO has caused various hiccups on the supply chain. To recap, Transform Master recently expanded its capacity by 30% to 18K tonnes/annum.

• Meanwhile, its trading division (that supplies largely to the construction sector) has been affected by the lack of new construction jobs in the market, coupled with the stopwork order during the MCO. We estimate that construction-related chemicals and products such as unsaturated polyester resin, paint/coating, PVC, etc. contribute up to 40% of the company's turnover.

• We believe the Covid-19 pandemic cuts both ways for Luxchem. The surge in demand for personal protective equipment such as gloves will drive Luxchem’s latex processing/compounding business. The segment contributes about 35% of its turnover. On the other hand, a sharp downturn in the global economy due to the pandemic (coupled with the cutbacks in infrastructure spending locally) will hurt demand for chemicals from customers in other sectors such as construction, automobile and electrical industry.

Source: AmInvest Research - 3 Apr 2020