Investment Highlights

• We maintain our BUY recommendation on Luxchem Corporation (Luxchem) with a lower fair value (FV) of RM0.88/per share (previously RM1.04/share). The lower FV is due to a reduction of FY22 earnings estimate and PE of 12.3x (from 14x). We make no adjustment to our FV based on our 3-star ESG rating (Exhibit 2).

• FY22/FY23 earnings estimates have been reduced by 6% each to RM71.9mil/RM73.2mil after raising the cost assumption. This is to incorporate higher raw material cost assumptions.

• Our target PE has been lowered to 12.3x, which is the average 5-year forward PE (as compared to the previous 14x which is a premium, above average). This is to reflect slower earnings growth going forward and volatile raw material prices.

• Luxchem’s FY21 core net profit of RM68.4 mil (+43% YoY) is below expectations, making up 91% of our fullyear estimates. We believe the reason for the underperformance is higher-than-expected raw material prices.

• 4QFY21 core net profit increased by 12.8% QoQ to RM16.6mil. Both trading and manufacturing segments revenue improved QoQ.

• In FY21, the group’s trading segment pre-tax margin rose to 8.0% (FY20: 5.1%). Meanwhile, its manufacturing segment pre-tax margin remained stable in FY21 at 11.7% (FY20: 11.9%).

• Luxchem announced a third interim dividend of 1.0 sen per share for 4QFY21, bringing total gross DPS to 2.7 sen for FY21. The ex-dividend date is 14 April 2022 wherein the dividend is due to be paid on 13 May 2022. Overall, the company paid out 40% of its EPS in FY21, representing 3.7% dividend yield.

• Luxchem is trading at 10.3x forward PE which is below its average of 12.3x.

• Risks to our BUY call include fluctuations in foreign exchange rates, volatile raw material prices, volatile raw material prices, as well as margin contraction due to intense competition.

Source: AmInvest Research - 18 Feb 2022