The Group (HGB) continued to be affected by recent raw material shortages and price escalation as a result of global supply chain disruptions, reflected by a relatively tepid 3QFY21 net profit of RM7.2m (-42.2% YoY, -3.2% QoQ). Making up only 45% of our full-year estimates, this is now deemed a miss as prolonged effects of the pandemic and movement restrictions are worse than expected. We trim FY21 estimates by 33% to account for the current spike in materials prices though keep forward earnings unchanged on expectation of a return to normalcy in FY22, underpinned by cumulative contributions from its recent acquisitions. Our Outperform call is retained with an unchanged target price of RM1.71. We like HGB’s prospects, with growth underpinned by its leadership position in the domestic agrochemical market space and supplemented by its acquisition-driven contributions.

• 3QFY21 highlights overview. The Group recorded sequentially higher revenue of RM112.5m (+0.9% YoY, +14.0% QoQ) due mainly to consolidation of results from the recently-acquired Specialty Chemicals businesses. Net profit was marginally weaker at RM7.2m despite contributions from the new business, as higher costs of goods and operating expenses took a bite off earnings. Net margin for the quarter slipped to 6.4% (2QFY21: 7.5%).

• The agriculture segment is still the main growth driver for now, with 3QFY21 revenue of RM93.6m, (-11.8% YoY, -1.5% QoQ) and net profit of RM8.8m (-60.7% YoY, -12.1% QoQ) making up ~85% of overall Group numbers. Underpinned by its leadership position in the domestic space, management anticipates sustainable income from going forward.

• The consumer products segment saw another weak quarter with a net loss of RM0.8m. Revenue of RM3.3m (-39.7% YoY, -10.7% QoQ) is even weaker, affected by movement restrictions during the quarter, a little worse than expected. Management is confident of the division returning to profitability in the near to medium term, though we maintain our caution.

• The specialty chemicals segment is the result of its acquisitions, with maiden revenue of RM15.5m and net profit of RM1.8m reported.

• Corporate exercises. The Group has now made 4 acquisitions since the start of this year, though earnings accretion are more apparent for 3 with their profit guarantees – the Chempro Group of Companies (cumulative 3- years: RM39m), the Nobel Group of Companies (cumulative 3-years: RM42m), and more recently Tufbond Technologies (cumulative 3-years: RM6m). A 49%-interest in Enra Kimia Sdn Bhd was also acquired for RM24.5m, which we gather makes about RM5m a year. We are positive on all these deals as they reduce the potential cyclicality in the Group’s earnings profile, which will incidentally be bumped up ~40%-50% (net of funding costs).

Source: PublicInvest Research - 23 Nov 2021