• MYR2.09 FV, based on 15x FY25F P/E. TMK Chemical aims to raise MYR385m from its IPO, primarily to fund its potential acquisitions and expand its chemical manufacturing business and facilities overseas. We forecast a 3-year earnings CAGR of 18%, supported by steady sales volume improvement amidst margin expansion via vertical integration with a further upside from potential acquisitions.

• Business overview. TMK is principally involved in the provision of total chemical management comprising sourcing, processing and distributing of inorganic chemicals and value-added services, as well as the provision of chemical terminal services. The inorganic chemicals offered comprise acids, alkalis, salts and other chemical products used in a wide range of industries. Additionally, the group is involved in inorganic chemicals manufacturing. With 15 facilities, two terminals and a manufacturing plant across Malaysia, Singapore, and Vietnam, TMK has built regional presence in South-East Asia.

• Expansion plans. TMK has allocated 26% of the IPO proceeds to acquire chemical-related companies to complement its current businesses. Additionally, the group is looking to spend 23% of the proceeds to expand its manufacturing plant in Banting and 13% to construct a new facility in Singapore. The doubling of manufacturing capacity is meant for vertical integration which could result in margin expansion.

• Forecasts. We forecast TMK’s revenue to grow at a 3-year CAGR of 5%, driven by improvement in sales volume across different regions. This growth is largely premised on securing new customers and a ramp up in manufacturing and industrial activities. We have also assumed a net margin expansion to 9-10% in FY24F-26F(from 7% in FY23), resulting in a 3-year earnings CAGR of 18%. This is predominantly led by vertical expansion with the commencement of its manufacturing of inorganic chemicals business since May 2024. Note that we have yet to factor in any earnings contribution from the potential acquisitions to be made utilising the IPO proceeds.

• Valuation. We derive a fair value of MYR2.09 pegged to a 15x FY25F P/E. Our target P/E is at a slight discount to the Bursa Malaysia Industrial Production Index’s current valuation of 16x. In the absence of comparable data, our target P/E of 15x also represents a premium over Ancom Nylex (ANC MK, NR) for a relatively bigger market cap, and better margin, coupled with further earnings upside arising from M&A activities.

• Key risks include global economic downturn which may affect the inorganic chemicals demand, spike in raw material prices, higher-than-expected overheads.

Source: RHB Securities Research - 29 Nov 2024