Investment Highlights

• We maintain our BUY recommendation on Luxchem Corporation (Luxchem) with unchanged forecasts and fair value of RM0.84/share based on 15x FY19F FD EPS, following a recent meeting with the company.

• The company appeared on track to meet our FY18F forecast. While facing increased competition in the unsaturated polyester resin (UPR) industry and weaker orders for polyvinyl chloride (PVC) orders due to the slowdown in the local construction industry, the demand for chemicals related to latex from the glove industry has remained strong.

• The group’s UPR manufacturing arm, Luxchem Polymer Industries (LPI), has been pushing to fill up its new capacity after facing increased competition following the entry of Taiwan-based Eternal Materials in 2QCY18. The new capacity had been available as at April and had increased LPI’s UPR capacity from 30K MT/year to 40K MT/year (+33%). As at May, its capacity is reported to be around 60%-70%.

• As for its Transform Master (TMSB) manufacturing arm, the group shared that it is running at near-full capacity and planned to further expand capacity from 13.8K MT/year to 20K MT/year (+45%) in the next few years, on top of its previous expansion of +44% in end-2017. We view this positively as it indicates a sturdy demand for chemicals related to latex from the glove industry, which is expected to be Luxchem’s main growth driver for FY18F. We have yet to include the further expansion plan into our forecasts. If we do so, FY20F core net profit could be raised by 6%.

• The stronger USD/MYR is positive to Luxchem’s margins as its exports are primarily USD-denominated and contribute 30% of the group’s turnover.

• Moving forward, the group reiterates its plans to grow its export market, especially on regions such as Indonesia and Vietnam as 76% of its FY17 manufacturing revenue was contributed by export sales.

• A dividend yield of ~4% is expected for FY18, consistent with Luxchem’s historical dividend payout of more than 40% of its net profit.

• We continue to like Luxchem due to its: 1) exposure to industries with stable and commendable growth such as glove (latex); 2) good earnings visibility backed by large clientele (~1,000 customers) and wide applications of its chemical products; and 3) capacity expansion in the group's manufacturing arms, LPI and TMSB.

Source: AmInvest Research - 6 Jul 2018