• Stay BUY, new MYR0.61 TP from MYR0.62, 15% upside plus 4% FY19F yield. Our TP reflects 13x P/E on FY19F EPS of 4.7 sen – as we imputed the faster-than-expected ESOS exercise, which lapses in November. Luxchem’s 1H19 core earnings are in line, at 47% of our full-year forecasts. This was from a combination of better margins, favourable FX and the absence of ESOS expenses in 2Q. Management declared an interim tier-1 dividend of 1 sen.

• A flat 1H. 1H19 revenue dipped 1% YoY to MYR391m on lower contributions from manufacturing (-13% YoY at MYR65m), while the trading segment grew marginally by 1% (MYR326m). PATAMI improved by 1% to MYR19.5m, on a better blended PBT margin of 6.7% in 1H19 vs 6.5% in 1H18. The higher overall PBT margin was due to the significant improvement in the manufacturing segment, which registered a 349bps PBT margin improvement to 20%. This helped to offset the 20bps drop in its trading margin (1H19: 4%). Luxchem’s domestic Malaysian operation saw a 5% decline in revenue to MYR273m, primarily due to the softer trading segment’s performance, while its Indonesian business recorded a 22% improvement in turnover to MYR59m – which could have been better if not for seasonal factors in 2Q19 ie Aidil Fitri festive season.

• QoQ, revenue declined by 7% to MYR188m due to the weaker trading segment (MYR155m in 2Q19 vs MYR171m 1Q19) which offset the manufacturing division’s improvement (MYR34m in 2Q19 vs MYR32m in 1Q19). As stated in our 2 May report titled Results In Line, a Catch-Up Play; Retain BUY, its Indonesian operation was also affected by the Aidil Fitri festive season. However, PATAMI improved 3% to MYR9.9m due to favourable forex movements, the absence of ESOS expenses (MYR0.1m in 1Q19) as well as lower administration-related outlays.
• We maintain our forecasts as we expect 2H operations to normalise from the Aidil Fitri season in 2Q.
• We maintain our BUY call, but cut our TP to MYR0.61 (13x P/E on FY19 EPS of 4.7 sen) as we factored in the faster-than-expected exercise of its ESOS, which expires in November. The stock has been trading flat YTD and revisiting its Dec 2018’s low, underperforming the FBMSC (+21%). Luxchem is trading at 11x P/E of FY19 EPS and with a 4% yield – which we deem as slightly cheap. It is expected to maintain its net cash position – further supported by positive cash flow generation.

Source: RHB Securities Research - 31 Jul 2019