• Keep BUY and MYR0.59 TP with 27% expected total return. With Luxchem Corp currently trading at 10.6x P/E of FY20F EPS, vis-à-vis its 5-year +1SD of 11.6x and FBMSC’s current forward P/E of 16.8x, we believe the stock has the potential to rebound – sweetened by a 4% yield. Moving into FY20, margins for its trading segment are expected to normalise, hence anchoring our forecasts for a modest PATAMI growth of 3.8%.

• Update on key business expansion initiatives. Recall that the company is building a new warehouse on a piece of reclaimed land at Pulau Indah with a capex of MYR17m allocated – entirely internally funded. On completion, the warehouse will have a floor space of 130,000sq ft. The project has reached 20% completion, with earthworks almost completed, while pilling has hit 50% completion. Upon completion, the new warehouse is expected to generate cost savings in terms of reduced rental payments. Luxchem manufacturing arm Transform Master’s (TMSB) plant expansion to 18,000tpa from 13,800tpa currently is on track for completion by year’s end. TMSB was acquired in 2016. During this period, its manufacturing capacity stood at 9,600tpa.

• No change to forecasts while expecting PBT margins for the trading segment to improve in FY20. We forecast FY19 PATAMI growth at 2.5% on better PBT margins for its manufacturing segment (18%), which offset its trading segment’s weak margins (FY19: 4%). For 9M19, Luxchem’s trading segment realised a PBT margin of 3.9%, which is near the low end of its last 5-year range of between 3.5% and 5.2% due to keener competition. Moving into FY20, we are expecting this segment to record a better margin of 4.4%. This is premised on expectations that the domestic glove sector will continue to see an annual organic growth of between 5% and 8% and that the sector’s financial performance will improve in FY20 after a relatively uneven performance in FY19 – this should alleviate the pricing pressure for the suppliers, including Luxchem.

• Maintain BUY with unchanged TP of MYR0.59 based on an unchanged 13x P/E on EPS of 4.5 sen. Despite the competitive nature of its business, we still like Luxchem for its relatively stable bottomline, strong operating cash flow, low capex intensity, net cash balance sheet, and healthy and sustainable ROE. This reflects management’s conservative style, where it has adopted measured expansion plans.

Source: RHB Securities Research - 9 Dec 2019