Hextar Global (HGB) saw further improvement in its sequential financial performance, with a 3QFY23 net profit of RM15.4m (+2.5% YoY, + 66.7% QoQ) reported due to better sales and net profit margin recorded. Cumulative 9MFY23 net profit of RM34.7m (-26.1% YoY) is within estimates at 73% of our full-year numbers. The weaker YoY performance is the result of slightly lower revenue (- 1.2% YoY) and notably higher interest expense (+108.8% YoY) however, due to the Group’s elevated borrowings to finance its acquisition spree in 2021, albeit earnings accretive. The current quarter’s improved performance is reflective of a return to normalcy in 2H2023 as expected, turning around from the weak 1H performance due to weaker selling prices of key herbicides, with customers also 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 relatively rich valuations at this juncture. Our PE-based target price is unchanged at RM0.63.

• Revenue contribution from the agriculture segment improved +13.3% YoY and +41.9% QoQ to RM106.1m in 3QFY23 due to stronger demand amid favorable selling prices for glyphosate-related products. Net profit contribution gained +39.3% YoY and +133.2% QoQ to RM12.0m as net margin improved to 11.4% (2QFY23: 6.9%), with efficient raw material stock management cited as a primary contributing factor. Going forward, management continues to see the division maintaining its market leadership position on the back of growing demand for agrochemicals.

• Revenue contribution from the specialty chemicals segment also improved notably by +23.5% YoY and +31.1% QoQ to RM76.9m in 3QFY23 due to consolidation of numbers from its new acquisitions, coupled with stronger exports of specialty chemicals for the rubber glove industry. Net profit contributions was higher by +7.9% YoY and +22.2% QoQ to RM14.1m during the quarter, a commendable achievement considering an RM3.7m interest cost charged in relation to deferred consideration arising from the acquisition of the specialty chemicals businesses.

• Recent developments. HGB has been active again in the acquisition space, though not as notable as in 2021, recently obtaining shareholders’ approval to complete (which it has) the acquisition of various companies via 51%-owned Hextar Fruits for RM84m in cash, to diversify its business away from the volatilities in the industrial and specialty chemical space. We have not accounted for this into our estimates, though having the potential to bump up earnings by ~20% going forward. HGB also recently completed the acquisition of a 100% equity interest in Propel Chemicals Sdn Bhd for RM16.5m to complement its exposure into the oil and gas chemicals space.

Source: PublicInvest Research - 21 Nov 2023