• HEXTAR GLOBAL (HGB) through its subsidiary, Hextar Kimia Sdn Bhd has proposed to buy 100% equity interest in Propel Chemicals Sdn Bhd (PCSB) for a total cash consideration of RM16.5mn.

• We are positive on the deal as the strategic decisions will result in HGB placing a stronger emphasis on its core chemicals businesses. Although we find this development encouraging and believe in the long-term potential of the plantation industry, along with the continued use of agrochemicals, which is further strengthened by their presence in the specialty chemicals sector, we are maintaining our recommendation to HOLD due to the short-to-medium-term operational challenges it might faces.

• There will be no changes to our earnings estimates at this juncture, pending management meeting with a TP of RM0.69.

Details of the Offer

Hextar Global Berhad (HGB) on 30th October 2023, through its 49% owned subsidiary, Hextar Kimia Sdn Bhd (HKSB), entered into a Share Sale Agreement (SSA) with Propel Global (PGB), Rancak Nikmat Sdn Bhd (RNSB) and Wiramas Baiduri Sdn Bhd (WBSB) (collectively referred to as the “Vendors”) for the acquisition of 1,008,000 ordinary shares, representing 100% equity interest in Propel Chemicals Sdn Bhd (PCSB) for a total cash consideration of RM16.5mn. As part of the Proposed Acquisition, HKSB is buying PCSB from PGB (with a 55% stake), RNSB (36.9%), and WBSB (8.1%). The acquisition is expected to be completed in the last quarter of 2023.

Rationale for the Proposed Acquisition

PCSB specializes in the manufacturing, trading, and distribution of Specialty Chemicals, along with offering environmental chemical services to the O&G industry. It has an extensive track record, spanning over 30 years in the provision of Specialty Chemicals and more than a decade of experience in supplying Oilfield Chemicals, making it well-qualified to participate in significant Oil & Gas chemical tenders. Additionally, PCSB possesses a licensed chemical storage and refilling facility that occupies 5 acres of land in Kemaman. On the other hand, HGB is engaged in the manufacture and distribution of agrochemicals, Specialty Chemicals in the hygiene and rubber industry. HGB also provides technical services and support to the downstream O&G industry, which complements its distribution of Specialty Chemicals. Both PCSB and HGB possess expertise in the field of manufacturing and distributing Specialty Chemicals, particularly in the area of Oilfield Chemicals.

The Proposed Acquisition is set to provide HGB with an opportunity to expand and enhance its Specialty Chemicals repacking business through its subsidiary, HKSB. This expansion is necessary as the current capacity is limited. Note that PCSB facility is poised to triple the current capacity of HKSB. The increased capacity will empower HKSB to grow its specialty chemical repacking business, which is currently constrained by its existing limitations. Furthermore, this acquisition offers HGB the potential to increase its earnings and profitability, ultimately adding value for its shareholders in the medium to long term. The integration of PCSB is expected to have a positive impact on HGB’s revenue and earnings once the Proposed Acquisition is successfully completed.

Sources of funding

As per the announcement, the Proposed Acquisition is expected to be completed in the fourth quarter of 2023. The successful completion will likely have a positive impact on HGB's revenue and earnings for the fiscal year 2024. According to the announcement, the cash consideration for the acquisition of RM16.5mn will be satisfied entirely in cash and will be funded through internally-generated funds. This would lead to a reduction in HGB's cash and cash equivalents from RM61.98mn to RM45.48mn, with the net gearing level increase to 0.96x from 0.89x (with total debt of RM256.9mn), as of March 2023.

Our view

We are positive on the deal as the strategic decisions will result in HGB placing a stronger emphasis on its core chemicals businesses. Note that in FY22, the revenue and PBT of the Specialty Chemicals segment stood at RM225.4mn (+388% YoY) and RM52mn (+591% YoY), respectively. To recap, in 2021, HGB diversified into Specialty Chemicals business coverings the hygiene sector, rubber industry and, oil and gas industry after acquiring 1) Alpha Aim (M) Sdn Bhd, Chempro Technology (M) Sdn Bhd and Protek Chemicals & Engineering Sdn Bhd; 2) Nobel Synthetic Polymer Sdn Bhd and Nobel Scientific Sdn Bhd; 3) Hextar Kimia Sdn Bhd (formerly known as ENRA Kimia Sdn Bhd), Hextar Oilfield Chemicals Sdn Bhd (formerly known as ENRA Oilfield Chemicals Sdn Bhd), Hextar Downstream Services Sdn Bhd (formerly known as ENRA Downstream Services Sdn Bhd), Hextar Kimia (Australia) Pty Ltd (formerly known as ENRA Kimia (Australia) Pty Ltd), International Chemicals Engineering Pty Ltd; and 4) Tufbond Technologies Sdn Bhd. While Agriculture segments continue to be the Group's primary revenue sources, the expansion into Specialty Chemicals has the potential to reduce the volatility and cyclicality of HGB's earnings in the future. We find this development encouraging and remain optimistic about HGB's long-term prospects, particularly how its presence in the Specialty Chemicals sector complements and enhances the revenue generated by the agrochemicals segment, ultimately enhancing the overall financial resilience of the company.

Maintain HOLD at TP of RM0.69.

Maintain a HOLD call with Target Price of RM0.69 based on sum-of-part (SOP) methodology. We are optimistic on the long-term prospects of HGB, given its robust standing within the domestic agrochemical sector and favourable 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.

Source: BIMB Securities Research - 30 Oct 2023