Downgrade to NEUTRAL from Buy with unchanged TP of MYR0.69, expected total return of 3%, as we roll forward our valuation to 2019F with the same 13x P/E on MYR0.053 EPS. 1H18 results met expectations, with topline and PATAMI making up 45% and 43% of our full-year estimates. Still, we lower our 2018F-2020F earnings by 2-3% to reflect lower margin assumptions. We remain encouraged by management’s vision to grow its overseas business, as it will be important for medium to longer term growth, while focusing on operational efficiencies – critical in the near term to protect margins against keener competition.

Results met expectations. 1H18 revenue fell by 6% to MYR396m due to a softer trading segment. Recall in 1Q17, Luxchem’s revenue benefited from the surge in raw material prices on unplanned global supply outage, which translated into higher selling prices during the period. A weaker USD/MYR YTD also played a role. PBT margin fell 65bps to 6.5%, as margin at the trading segment was compressed by keener competition, dipping to 4.2%. The manufacturing segment’s PBT margin was at 16.5%. These translated into a lower PATAMI of MYR19.4m in 1H18 (-13% YoY). On a QoQ basis, both 2Q18 topline and PATAMI were marginally higher by 1% to MYR199m and MYR9.7m, as lower PBT margin at the trading segment (2Q18: 3.6% vs 1Q18: 4.8%) was partly compensated by margin improvement at the manufacturing segment (2Q18: 19.3% vs 1Q18: 13.9%). An interim DPS of MYR0.01 was declared.

Minor tweaks to our forecasts. We lower our 2018F-2020F estimates by 2 - 3% to reflect the 1H results, particularly margins, and expectations that business activities in the 2H will be better on normalisation of orders (2Q was affected by long holidays, particularly in Indonesia, and also the scaling down of purchases from domestic buyers towards the zero-rating of GST in Malaysia).

All key markets softened. All key markets including Malaysia, Indonesia and Vietnam – representing 95% of 1H18 total revenue – saw a drop in revenue. Indonesia’s operations were particularly affected, with sales contracting by 11%, due to the long Aidil Fitri holiday in 2Q and a weaker IDR.

Downgrade to NEUTRAL with same MYR0.69 TP, as we roll forward our valuation to 2019F with EPS of MYR0.053 and same 13x P/E, with expected total return of 3%.

Source: RHB Securities Research - 27 Jul 2018