As a trusted one-stop solution provider in the local and overseas industrial chemicals/materials supplies, we remain cautiously positive on Luxchem (non rated) amid undemanding valuation at 10.8x FY19 P/E (33% lower than its peers), supported by a steady FY18-20 earnings CAGR of 9% and decent yields of 4.5-5.3% pa. There is sign of potential downtrend reversal amid rounding bottom formation.

Strong track record. Founded in 1984, Luxchem is a supplier of industrial chemicals that operates in two segments: (1) trading and distribution of petrochemicals and other products (contribute ~20% to revenue) related to rubber, latex, fibreglass reinforced plastics (FRP), coating, ceramic and polyvinyl chloride (PVC) industries; and (2) manufacturing (contribute ~80% revenue) of unsaturated polyester resins (UPRs) and various specialty chemicals for the latex industry.

Luxchem has a diversified clientele. Its large customer base (comprising near to 1000 customers) mitigated the concern of supplier switching and excessive reliance on clients' performance. Currently, the group is striving to grow its export markets (contribute ~30% to sales), especially the higher-growth regions like Indonesia and Vietnam. Management's effort is already coming to fruition, evinced by a CAGR of 19% in its export revenue from FY13 to FY16, outpacing the growth of its domestic sales (7% CAGR).

Steady growth. Despite challenging factors such as USDMYR fluctuations, raw material price fluctuations, raw material demand and supply and keen competition, management is cautiously optimistic of a sustainable growth ahead. Bloomberg consensus are forecasting Luxchem's PATAMI to grow at 9% CAGR from FY18-20, premised on: 1) rising glove demand underpinned by stricter hygiene standards, which would boost sales of latex-related products; ii) good visibility from the PVC segment given the steady growth of intermediate inputs in the construction industry; and iii) capacity expansions.

Early signs of bottoming up. Luxchem’s share price has been on downtrend since hitting a YTD high of RM0.825 (9 Jan) to a recent low of RM0.585 in 02 May 2018 after the release of its quarterly results. LT uptrend remains intact as Luxchem is still trending above the weekly support trendline near RM0.57. After hitting a trough near RM0.585, share price appears to have bottomed out to end at RM0.625 yesterday, accompanied by the saucer bottom pattern and mild hook-up in its daily indicators. Should the share price break past RM0.65 (20d SMA), it is likely to head further towards RM0.68 (38.2% FR) and our LT objective at RM0.735 (200d SMA). Supports can be identified at RM0.60 and RM0.585. Cut loss at RM0.57.

Source: Hong Leong Investment Bank Research - 7 Jun 2018