• Following our recent meeting with Hextar Global Berhad (HGB) management, we are of the view that business growth will be driven by: i) a promising outlook in the oil & gas industry, which is driving demand for specialty products; ii) contributions from the newly established Fruit segment; and iii) sustained demand for agrochemical products from the plantation sector.

• We maintain a HOLD recommendation on HGB with a higher TP of RM0.98 (RM0.79 previously). Our valuation is based on the Sum of Parts (SOP) methodology.

Diversification into Specialty Chemicals to Propel Growth

The group shared that the Specialty chemicals segment is now one of the key focuses that the company wishes to prioritize, believing it will spur business growth. Recall that HGB diversified into the specialty chemicals business segment back in 2021, covering the hygiene sector, rubber industry, and oil and gas industry. In the recent FY2023 financial performance, the segment revenue experienced a significant 20.4% YoY growth, supported by a strong 22.5% of PBT margin, thanks to robust contribution from oil & gas and chemicals cleaning sectors. Given the current encouraging outlook for the oil & gas industry, we are foreseeing a corresponding rise in demand for specialty chemicals. Besides, the recent acquisition of a chemical company [click here] will enhance the company’s customer base, product range, and manufacturing capabilities within the segment.

Fruit Segment Spices Group Growth

A new segment for HGB, the Fruit segment began contributing to the group during 4Q2023. This segment was acquired in July 2023 following the acquisition of PHG Ever Fresh Group Sdn Bhd, one of Malaysia's largest durian processing factories and exporters. The durian processing factory situated in Raub, Pahang, is equipped with advanced liquid nitrogen freezers and cold storage facilities to ensure the freshness and preservation of durians for export. Besides, PHG Group annually supplies and exports over 3,000 tonnes of durians to various countries including China and Indonesia. We anticipate sustainable earnings from this segment due to the growing demand from both local and global consumers.

Agrochemical Segment Continues to Thrive

Its bread and butter, Agrochemical segment which specializes in herbicides, insecticides, fungicides, rodenticides, public health, and other products, commanding a significant 30% share of the pesticides market in the country. This segment is believed to remain reliable given the elastic demand for the products, particularly from plantation sector. Despite being affected by commodity price volatility, planters continue to rely on agrochemicals for estate maintenance and control. It is crucial to note that these products must be registered as controlled goods, meeting rigorous standards and holding certifications such as ISO 9001:2015 and MS ISO 45001:2018. Additionally, the group has 150 distributors spanning over 30 countries.

Resilient Financial Performance Expected

We expect FY23-26F revenue to grew by 10-13% YoY, accompanied by a double-digit operating margin ranging between 17-20%. This growth trajectory is bolstered by the anticipated significant contribution from the newly acquired subsidiary, Propel Chemical Sdn Bhd, which strengthens HGB's position favourably in the specialty chemical segment. Additionally, steady contributions from the Fruit segment are expected, driven by sustained demand for durian. Furthermore, the essential usage of agrochemical products within plantations will continue to enhance the overall financial resilience of the company.

Reiterate HOLD at TP of RM0.98

We have revised our FY24-25F earnings forecast higher by 58% to RM65.9-76.9mn, respectively, to account for better sales volume and margin. Additionally, we have introduced an FY26F earnings forecast of RM83.6mn, translating into an 8.8% net margin. Maintain a HOLD recommendation on HGB with a higher TP of RM0.98 (RM0.79 previously). Our valuation is derived from SOP methodology.

Source: BIMB Securities Research - 2 May 2024