Hextar Global (HGB) reported another sequentially stronger quarter, albeit marginal, with a 2QFY23 net profit of RM9.2m (+7.0% QoQ), though notably weaker YoY (-40.9%) due to lower sales and higher finance costs. Cumulative 1HFY23 net profit of RM19.3m (-39.5% YoY) is currently below estimates at 33% of our full-year numbers, though we continue to keep earnings estimates unchanged on expectation of a return to normalcy in 2H2023. The weaker 1H performance continues to be attributed to weaker selling prices of key herbicides, coupled with customers adopting a “wait-and-see” attitude in anticipation of the lower selling prices. While longer-term prospects in the plantation industry and the continued application of agrochemicals remain encouraging, complemented by its exposure in the specialty chemicals space, we retain our Neutral call on the stock given near term operating challenges. Our PE-based target price is unchanged at RM0.63.

• Revenue contribution from the agriculture segment improved +7.5% QoQ in 2QFY23 to RM81.7m due to gradual improvements in operating conditions, though lower 15.5% YoY as a result of the lower selling prices of key herbicides as mentioned. Management expects a gradual return to normalcy from 2H 2023 onwards with volatile prices and demand pressures abating as the external environment improves. Net profit contribution gained +13.0% QoQ to RM3.5m, though was lower by 63.6% YoY.

• Revenue contribution from the specialty chemicals segment was stable at RM58.7m (+9.0% YoY, +2.8% QoQ), sustained by improved performance in the oil and gas industry which continued to negate waning contributions from the rubber glove industry. Net profit (before minority interest) contributions was higher by 26.3% YoY and +8.0% QoQ to RM11.5m due largely to better operating margins.

• The consumer products segment was exited from in the current quarter.

• Recent developments. HGB recently announced the acquisition of various companies via 51%-owned Hextar Fruits for RM84m in cash, in efforts to diversify its business away from the vagaries of the industrial and specialty chemical space. The various acquisitions will see HGB involved in the trading of durian and wholesale of fruits. While the potential is attractive, notably the vast market in China which it aims to penetrate into, we are neutral on this development. Costing a trailing price-earnings ratio of ~9x, the acquisition is earnings and value accretive, though we err on the side of conservatism and keep estimates unchanged at this juncture. Management expects this new segment to potentially contribute 25% (or more) of the Group’s net profit.

Source: PublicInvest Research - 22 Aug 2023