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.
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