Investment Highlights

• We maintain our forecasts, but raise our fair value (FV for Luxchem by 9% to RM0.63 (vs. RM0.58 previously) based on 14x FY21F EPS (vs. 13x previously) as we now value the stock at a 2x multiple premium to its average historical forward P/E of 12x (vs. 1x multiple premium previously). This is to reflect the improved trading sentiment towards glove-related stocks (Luxchem is engaged in latex and nitrile processing/compounding) on expectations of a prolonged Covid-19 pandemic.
• Luxchem’s 1HFY20 results met expectations at 47% and 49% of our full-year forecast and the full-year consensus estimates respectively.
• The group’s 1HFY20’s turnover shrank 19% YoY due to lower sales for most of its chemical products (except latex) during the movement control order (MCO) period. However, its core net profit only eased by 7% YoY, we believe, mainly due to improved margins for nitrile products as a result of good prices on strong demand, coupled with better economies of scale on increased production volumes.

• Key highlights from the briefing yesterday are:

1. Transform Master Sdn Bhd (TMSB), the unit engaged in latex and nitrile processing/compounding, completed its capacity expansion (by one-third from 1,500MT/month to 2,000MT/month) in June 2020. At present, it operates at about 75% capacity. Luxchem guided for higher orders to come in 2HFY20 or early FY21 in tandem with the commissioning of new capacity of several glove players.

2. Production of unsaturated polyester resin (UPR) (used largely in the construction, automobile and electrical industries) under Luxchem Polymer Industries (LPI) is expected to remain stable at 40K MT/annum, translating to a utilisation rate of 70%-75% for FY20 (vs. ~75% historically).

3. Luxchem noticed a significant pick-up in orders for most of its chemicals post the MCO. However, it is cautious that these could just be spikes as customers rebuild their inventory (or in other words, recurring orders still depend on sustained economic recovery). Despite the improved orders, margins for the trading segment remain soft as suppliers (Luxchem included) are still stuck with build-up stock of chemicals during the lockdown.

• 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 and nitrile processing/compounding businesses (the segment contributes about 35% of its turnover in FY19). 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.

Source: AmInvest Research - 30 Jul 2020