Investment Highlights

• We reiterate our BUY recommendation on Luxchem Corporation (Luxchem) with an unchanged fair value of RM0.91/share, based on 15x FY18F FD EPS. We have trimmed our FY17F earnings 18% following a disappointment in the 9MFY17 results. However, positive prospects of the company remain intact.

• Luxchem recorded a net profit of RM9mil in 3QFY17, representing a slight QoQ improvement of 4%, but a decline of 10% YoY. For the cumulative period (9MFY17), the group's net profit inched up 4% YoY on the back of an 18% YoY expansion in revenue. The 9MFY17 came in below both our expectations and consensus at 63% and 66% of FY17F's fullyear forecasts.

• The results’ disappointment stemmed from a lower-thanexpected improvement in 3QFY17's pre-tax margin, which increased 0.8ppt from 5.8% in 2QFY17 to 6.5% in 3QFY17. We had earlier expected improvements of a bigger quantum due to a recovery in chemical prices, including those of butadiene and unsaturated polyester resins (UPR). However, management said that the increase in the public reference price of chemical products was not well received by the market. Some customers had previously hoarded inventory and were reluctant to purchase at higher prices.

• The results were also dragged by an exceptionally high impairment on trade receivables as well as foreign exchange losses due to a weaker USD. Together, these two items amounted to a non-operating expense of RM1.2mil. We note that the impairment on receivables stemmed largely from a long-time UPR customer. Management has expressed confidence in recovering the impairment, reassured by the past track record of the customer.

• On a positive note, we gather that the revenue synergies from its newly acquired Transform Master (TMSB) were fruitfully unlocked, evidenced by a quick capacity fill-up from 80% utilisation in 1HFY17 to full capacity currently. In light of this, management has indicated that the group is considering expanding TMSB's capacity further within the next two years (on top of the 2.4kt/year that is coming onstream by yearend). We view this positively as TMSB's products are largely sold to glove companies, which are experiencing sturdy growth.

• We continue to like Luxchem because of its: 1) good earnings visibility backed by large clientele (~1,000 customers) and wide applications of its chemical products; 2) exposures in industries with stable and commendable growth such as its Latex and PVC segments, demand of which is tied to the glove and construction sectors respectively; and 3) capacity expansions in the group's manufacturing arms, LPI (+33%) and TMSB (+25%).

Source: AmInvest Research - 25 Oct 2017