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 tweaked our FY18F-FY19F net profit forecasts by 0.1-0.7% for housekeeping reasons. At this price, Luxchem appears undervalued with CY18F PE of 12x vs. its peer average of 15x. Dividend yield remains attractive 3-4%, especially for a company with decent growth.

• Luxchem's FY17 net profit of RM40.7mil came within our expectations but below consensus, representing a slight YoY decline of 6%. In spite of a sturdy revenue expansion (+15% YoY), forex losses arising from cash revaluations and its transactions with USD-based suppliers/receivables have caused a dent in the group’s net margin and the dip in bottom line. In addition, FY16’s trading margin was exceptionally high due to a sharp runup in chemical prices, especially butadiene. The rally was short-lived, and frequent occurrences are not to be expected.

• For 4QFY17, Luxchem registered a net profit of RM9.5mil, inching up 6% QoQ in tandem with its revenue growth of 5%. However, the 4QFY17 net profit represented a YoY decline of 30% mainly due to a high base effect. Recall that, in the preceding year quarter (4QFY16), the price of butadiene skyrocketed owing to production cuts/shutdowns in Hangzhou and Ningbo City to reduce air pollution as well as an explosion at BASF's (largest chemical producer in the world) Ludwigshafen plant in Germany.

• Moving forward, we believe China’s ongoing pollution crackdown, which forces numerous manufacturing factories (including chemicals) to shut down, would generate spillover demand for Luxchem as supply in the country lessens. In addition, a tighter supply in the market also bodes well for chemical prices, potentially benefitting Luxchem should prices trend up steadily.

• 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 (+44%).

Source: AmInvest Research - 15 Feb 2018