Investment Merit

Having demonstrated strong growth in its 3Q17 quarterly report card, we believe SAMCHEM is on track to achieving record earnings year. This is premised on its: (i) maiden profits from its operations in Vietnam, and (ii) deeper foray into the Indonesian market neighbouring as well as emerging SEA markets. Meanwhile, increased focus towards the higher margin chemical blending products and greater economies of scale should also see margins expanding to provide earnings growth of 43.8%/33.6% for FY17/FY18. We accord a Trading Buy recommendation on SAMCHEM with a TP of RM1.20.

SAMCHEM is a market leader for the distribution of intermediate & specialty chemicals in Malaysia and has expanded its footprint into Southeast Asian markets such as Vietnam, Indonesia, Singapore, Cambodia and soon, Myanmar and Philippines.

Tapping into industrialisation boom in regional markets. Backed by long-standing relationships and distribution rights with global chemical producers; we believe that the company is well positioned to benefit from the industrialisation boom in regional markets. SAMCHEM already has a strong presence in high growth markets such as Vietnam and Indonesia where it commands c.30% and c.10% market share, respectively. In fact, we understand that the company is poised to achieve maiden profits in Vietnam, and intends to make its warehouse and distribution office in Ho Chi Minh city as a staging point to venture into neighbouring Indochina markets such as Cambodia as well as Myanmar and Philippines by end-2018.

Laying the foundations for long-term growth! Meanwhile, the recent acquisition of 4.6 acres of industrial land in Pulau Indah will provide an ideal base for import and export-related activities due to its strategic location adjacent to Westport. We understand that the land has been earmarked for a complete set-up (slated for completion by end-2019) to include a bulk storage warehouse, chemical blending and T&D division and this would provide the company with an avenue to meet the burgeoning demand not just from local and the Indonesian markets, but also previously untapped markets beyond Southeast Asia. Additionally, increased focus towards high margin chemical blending products should also lift the group margins over the longer run (chemical blending products provide >15% gross margins vs. the 12.5% currently).

Estimating Net Profit to jump by 46.7%/31.9% for FY17/FY18, driven by: (i) a 23.7%/12.9% increase in revenue amid high growth Vietnam and Indonesia markets, and (ii) gross margin expansion (11bps/39bps) on higher margin chemical blending products and greater economies of scale, which would expand bottom line margins by 36bps/46bps to 2.52%/2.16%. At the same time, we expect CAPEX to surge to RM10m/RM15m for FY17/FY18 (vs. 5-year average: RM3.1m). Although our 3.2 sen /4.3 sen dividend expectations (DY: 3.3%/4.5%) assumes a lower pay-out of 40% (FY16: 59%), we see this as a necessary evil given that net gearing will rise to 0.8x from 0.7x.

Trading Buy with TP of RM1.20. We value SAMCHEM based on 11.3x FY18E PER, which comes at a 10% discount to listed peer LUXCHEM. Despite the smaller market capitalisation, we expect the valuation gap to narrow given the superior earnings growth of 43.8%/33.6% compared to LUXCHEM (at 14.1%/11.6%) and strong positioning in the regional markets (export markets account for 47% of revenue compared to LUXCHEM’s 30%) while dividend yield of 3.3/4.5% is comparable to LUXCHEM’s 3.3%/3.7%. Risks include: (i) delay in set-up of Pulau Indah facility, and (ii) volatility in chemical prices.

Source: Kenanga Research - 13 Nov 2017