Investment Highlights

• We raise our FY21–22F EPS forecasts by 5% respectively, having reflected the impact of an ongoing private placement and acquisition. Consequently, we increase our fair value by 6% to RM0.84 (from RM0.79) based 14x revised FY21F, which is at 2x multiple premium to its average historical forward P/E of 12x. This is to reflect investors’ sustained appetite for glove-related stocks since the pandemic (Luxchem is engaged in latex and nitrile processing/compounding). Maintain HOLD.

• Luxchem’s FY20 results met our forecast but beat the consensus estimates by 6%.

• The group’s FY20 turnover shrank 5% YoY due to lower sales for most of its chemical products (except latex) during the initial movement control order (MCO) period.

• However, its core net profit improved by 24% YoY, we believe, due to margin expansion stemming from: (1) inventories acquired at low prices prior to the strong recovery in prices of chemical products in 2HFY20; and (2) better economies of scales on higher production at the manufacturing segment.

• We are reflecting in our forecasts the ongoing private placement and acquisition Luxchem first announced in December 2020, as thus far Luxchem has already placed out 70.8mil new shares at RM0.71/share, while the acquisition is pending approval from its shareholders and creditors.

• To recap, Luxhem has proposed:

1. A private placement of up to 134mil new shares at an indicative issue price of RM0.7243 to raise up to RM97.3mil proceeds; and
    
2. An acquisition of a 55% equity stake for RM121mil in Lexis Chemical, Lexis Specialties and Lexis Corporation, which are involved in manufacturing and trading of industrial chemicals and materials for the rubber glove and dipped latex industries. The acquisition comes with a profit guarantee of RM60mil net profit over three financial years ending February 2023.

• 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, of which it is expanding via capacity expansion and acquisition. However, at 13–15x forward earnings for a small-cap manufacturing company, we believe the upside to its valuation is capped.

Source: AmInvest Research - 22 Feb 2021