Investment Highlights

• We reiterate our BUY recommendation on Luxchem Corporation (Luxchem) with a lower fair value of RM0.81/share (previously RM0.84/share), pegged to 15x FY19F FD EPS. This represents a 17% upside.

• We have trimmed our FY18F-FY20F earnings by 2-5% due to continued stiff competition in the unsaturated polyester resin (UPR) industry and an expected slowdown in its Indonesian segment due to currency exchange fluctuations and the upcoming Indonesian presidential elections in 2019.

• Luxchem’s 2QFY18 core net profit came in slightly below expectations at RM10.0mil (QoQ: +1%, YoY: +10%). This brings 1HFY18 core net profit to RM19.8mil, which accounts for 45% of our full-year forecast and 44% of consensus estimates.

• 1HFY18 core net profit slipped 11% YoY amid a 10% depreciation of the MYR against the USD (3.9372 in 1HFY18 vs. 4.3884 in 1HFY17). Luxchem’s 1HFY18 turnover fell 6% mainly from a reduction in local sales by 5%. The decline in local sales stemmed from the group’s trading segment, which saw a fall in revenue and PBT of 8% and 19% respectively.

• In Indonesia, Vietnam and Thailand, lower export sales were due to weaker sales in the manufacturing segment. We suspect this is due to headwinds faced by Luxchem’s UPR manufacturing arm Luxchem Polymer Industries (LPI), which continues to operate in a highly competitive environment. LPI continues to push to fill up its new capacity of 10K MT/year after facing increased competition coupled with a slower market. Its capacity is reported to be filled up around 60-70%.

• On the other hand, its Transform Master (TMSB) manufacturing arm is running at ~80% capacity and the group plans to further expand capacity from 13.8K MT/year to 20K MT/year in the next few years, indicating a sturdy demand of latex and latex-related chemicals from the glove sector. We view this positively as Luxchem is one of the key suppliers to the glove sector, which remains its main growth driver for FY18F.

• Moving forward, we expect a better 2HFY18 as 1HFY18 was impacted by fewer working days in Malaysia and Indonesia due to Hari Raya festivities falling in the 2QFY18, and uncertainties in the local market post-GE14. The group continues to boost its regional presence, especially in Indonesia and Vietnam.

• We continue to like Luxchem due to its: 1) exposure to industries with stable and commendable growth such as the glove sector (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 - 27 Jul 2018