Investment Highlights

• We maintain our forecasts and fair value (FV) of RM0.79 for Luxchem Corporation (Luxchem), based on 14x FY21F EPS, valuing the stock at 2x multiple premium to its average historical forward P/E of 12x. This is to reflect investors’ increased appetite towards glove-related stocks since the pandemic (Luxchem is engaged in latex and nitrile processing/compounding). We upgrade our recommendation to HOLD from SELL after the recent pullback in share price.
• Luxchem has announced two proposals:
  1. A private placement of up to 134mil new shares (or 15% of its existing total issued shares) at an indicative issue price of RM0.7243 to raise up to RM94.3mil net proceeds (after deducting expenses for the exercise); and
  2. Acquisition of a 55% equity stake in Lexis Chemical, Lexis Specialties and Lexis Corporation each, for RM121mil cash. The companies are principally involved in manufacturing and trading of industrial chemicals and materials for the rubber glove and latex dipped industries. The acquisition comes with a profit guarantee of RM60mil net profit over three financial years ending February 2023, translating to an acquisition PE of 11x which is below Luxchem’s current trading forward PE of 14x.
• Based on our estimates, the two deals combined are EPS accretive to the tune of 4–5% (after factoring in the profit guarantee and dilution from the new shares). Upon completion of the deals, this shall raise our FV to RM0.83 based on the same valuation basis.
• We are positive on the latest development. Apart from expanding Luxchem’s exposure in the growing glove-related industries, we believe Luxchem could derive synergy and economies of scale via the acquisition. Also, as mentioned, the acquisition valuation is reasonable at 11x forward PE which is below Luxchem’s current trading forward PE of 14x
• We believe Luxchem has shrugged off the pandemic. The demand for chemical products has recovered as economies reopen. Meanwhile, the demand for personal protective equipment such as gloves will continue to drive Luxchem’s latex and nitrile processing/compounding businesses (the segment contributes about 35% of its turnover in FY19). However, based on the last traded price, we believe the valuations are fair.

Source: AmInvest Research - 15 Dec 2020