Investment Highlights

• We maintain our forecasts for Luxchem Corporation (Luxchem) but raise our FV by 15% to RM0.55 based on 13x FY21F EPS (from RM0.48 based on 11.5x FY21F EPS previously), at a 1x multiple premium to its average historical forward P/E of 12x. The P/E upgrade is to reflect the improved trading sentiment towards glove-related stocks (Luxchem is engaged in latex processing/compounding) on expectations of a prolonged Covid-19 pandemic. However, we believe valuations have become rich after the recent run-up in its share price. Downgrade to SELL from HOLD.

• We expect Luxchem’s 1QFY20 results, due to be announced this month, to come in at RM9–11mil at the net level, which will be in line with expectations, accounting for 24–30% of our full-year forecast and the full-year consensus estimates.

• We believe the company might see a slowdown in export sales in 1Q as the Covid-19 pandemic disrupted both the demand and supply of chemicals. We understand that Luxchem sources the bulk of its inputs from China (which was under significant lockdowns in Feb–Mar 2020). On the other hand, we also believe there could have been a slowdown in the demand for chemicals as main users (especially those in the construction, automobile and electrical segments) shut down or operated at reduced capacity under the movement control order (MCO).

• Meanwhile, its manufacturing segment could be an exception. Luxchem could have seen higher demand for its glove-related products. This is consistent with our assumption of full utilization of the segment’s capacity in FY20F. To recap, the segment under Transform Master (TMSB) has recently expanded its capacity by 30% to 18K tonnes/annum.

• 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 the electrical industry.

Source: AmInvest Research - 15 May 2020