Hextar Global Bhd (HGB) 1H23’s Core PATAMI of RM20.9mn (-35% YoY) came in below our and consensus estimates, accounting for only 38% and 39% of full year forecast respectively. The lower YoY earnings were mainly due to lower revenue contribution from the agrochemical segment, dampened by competitive pricing environment, higher operating expenses and finance costs. Looking ahead to FY23F, we expect a 16% YoY decline in core PATAMI due to HGB’s low-price environment in agriculture segment and higher operating expenses. In light of the adjusted earnings expectations, we have revised lower our TP from RM0.74 to RM0.69. Our recommendation remains at HOLD.

• Below expectations. HGB’s 1H23 core PATAMI of RM20.9mn trailed our and consensus’ expectations, accounting for only 38% and 39% of full year forecast. The deviation against our projection was mainly due to the higher-than-expected operating expenses, finance cost and unrealised forex loss of RM1.54mn – on the back of 11% drop in revenue (dragged by lower contribution from agrochemical segment).

• QoQ. Core PATAMI in 2Q23 increased by +18% QoQ to RM10.2mn. This rise was attributed primarily to higher profit contributions from both the Specialty Chemicals segment and Agrochemicals segment, which collectively bolstered the Group's financial performance. This positive outcome was a result of improved profit margins achieved in both segments, with figures stood at 25.2% and 8.2% respectively, as indicated in Table 2.

• YoY. The Group's revenue experienced a 15% YoY decline, settling at RM134mn. This decrease can be attributed to a reduced contribution from the agrochemical segment, primarily caused by subdued selling prices of key herbicide products. However, this decline was partly offset by robust revenue growth in the Specialty segments which saw substantial revenue expansion, benefiting from strong demand for specialty cleaning chemicals from institutions, hotels, and restaurants, as well as the oil and gas industry. On that score, PATAMI dropped by 41%, mainly due to higher finance cost and operating expenses (forex loss and impairment of doubtful debts), added by lower share of result from JV that pressurised margin to drop to 6.9% from 10% in 2Q22.

• Outlook. We are optimistic on the long-term prospects of HGB, given its robust standing within the domestic agrochemical sector and favorable growth trajectory anticipated for the Specialty Chemicals segment. We hold the belief that these key factors will collectively play a substantial role in fostering sustained earnings growth for the company over an extended period. This outlook is underpinned by the anticipated increase of revenue from the specialty chemicals that is expected to synergistically enhance the revenue generated by the agrochemicals segment, thereby enhancing the overall financial resilience of the company.

• Our call. Following the result, we tweak our FY23 and FY24 earnings forecast lower to RM41.7mn and RM48.4mn respectively from RM54mn and RM52.7mn previously, as we revisit our assumptions on revenue, margins and costs to be more reflective of current and future expectations. Maintain a HOLD call with a new lower Target Price of RM0.69 (RM0.74 previously) based on sum-of-part (SOP) methodology – Table 3.

Source: BIMB Securities Research - 22 Aug 2023