INVESTMENT HIGHLIGHTS

• Reaping fruits from regional expansion

• Upping the volume game

• Expect earnings growth of 11% in FY17F

• Not rated with FV of RM1.55 based on FY17F PER of 12x

Business Overview:

Samchem Holdings Bhd (Samchem) is a chemical distributor with operations in Malaysia, IndoChina and Indonesia. It was established in 1989 and sells over 500 types of products to more than 3000 customers. It is the appointed as distributor for major principals like Petronas Chemicals, Shell Chemicals, ExxonMobil and BASF.

Investment theses: 1. Reaping fruits from regional expansion. Samchem set up its offices in Vietnam in 2006 and Indonesia in 2009. This is followed by Singapore in 2010 and Cambodia in 2014. Over the years, contribution from overseas sales has improved substantially from under 30% in FY12 to close to 50% now. This helps Samchem mitigate single-market risk.

2. Upping the volume game. The business of chemical distribution is in the scale. Samchem is able to increase its sales volume through acquiring market share and replicating its business model in the regional markets. It has 10 warehouses and 8 offices in strategic locations to help it reach its clients efficiently.

3. Higher volume, better margins. Over the years, Samchem has invested in its distribution infrastructure. We opine that most of its fixed costs have stabilised and the additional sales will be translated into improved margins. 9MFY16 PBT margin was 4.05% compared with 1.86% in FY15. Assuming that the PBT margin stays in this range, Samchem should see improved earnings.

4. Expect earnings growth of 11% in FY17F. Higher sales from developing markets like Indonesia, Cambodia and Vietnam provides growth visibility for Samchem. Earnings are estimated to grow in tandem with sales as higher volume should result in better profit margin.

Valuation:

We ascribe a fair value of RM1.55 on Samchem based on 12x PER of FY17F. We estimate its FY17F EPS to be 12.93 sen. The 12x PER is based on the simple average of chemical distributors listed on Bursa.

Source: MIDF Research - 25 Jan 2017