Investment Highlights

• We raise our FY21–23F EPS forecasts by 22% respectively, and increase our fair value (FV) by 24% to RM1.04 (from RM0.84) based on 14x revised FY22F EPS (vs. 14x FY21F EPS previously), which is at 2x multiple premium to its average historical forward P/E of 12x. We make no ESG related adjustment to our FV based on our 3-star rating for Luxchem. We upgrade our recommendation to BUY.

• Luxchem’s 1QFY21 results beat expectations, accounting for 34% of our full-year forecast and full-year consensus estimates respectively. We believe the variance against our forecasts came largely from much stronger margins, underpinned by: (i) a strong recovery in prices of chemical products; and (ii) lower finance costs and tax rate.

• The group’s 1QFY21 turnover improved by 19% YoY due to higher sales for its chemical products, we believe, as it benefits from the recovery in prices for its chemical products as demand recovers, following the reopening of economies around the world.

• Its core net profit improved by an even stronger 45% 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 1QFY21; and (2) lower finance costs and tax rate.

• Meanwhile, Luxhem is on track to complete the following corporate exercises first proposed in Dec 2020:

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.

• Thus far, Luxchem has placed out 101.2mil new shares and raised RM72.6mil. We already reflected these exercises in our forecasts.

Source: AmInvest Research - 22 Apr 2021