• Keep BUY and MYR0.59 TP, 16% expected total return. Luxchem Corp is expected to issue its FY19 results by the end of this month. We understand it has been experiencing higher demand recently from the gloves manufacturing sector due to the coronavirus outbreak. Pending release of its quarterly results, as well as additional information on the impact on demand and material supplies, we maintain our forecasts and TP. The latter is based on 13x P/E of on FY20F EPS of 4.5 sen.

• Expecting slightly better full-year results. We forecast Luxchem to register an FY19 PATAMI of MYR38.9m, a slight improvement from the MYR38m recorded in the previous year. Recall that this figure in 9M19 stood at MYR28.1m. The coronavirus outbreak has seen the company receiving higher purchase orders from its glove-making clients. However, as the situation is still evolving – particularly in terms of the possible duration of the outbreak, which varies amongst the experts – we are keeping our FY20 forecasts, pending a post results meeting with management.

• Transform Master’s capacity upsizing is now complete. We understand that Luxchem’s manufacturing arm, Transform Master, completed its plant expansion at the end of 2019 – this was according to schedule. The expanded facility can now handle 18,000 tonnes pa (tpa) from 13,800tpa previously. Recall that Transform Master was acquired in 2016. At the time of acquisition, it had a manufacturing capacity of 9,600tpa.

• We maintain our call and TP, which is based on an unchanged 13x FY20F P/E on EPS of 4.5 sen. Luxchem’s stock has experienced increased market followings in the past three weeks as a thematic play. This is arising from the coronavirus outbreak, given its exposure to the gloves sector. Interest may sustain should the outbreak’s peak be delayed. Pending the post results meeting with management, we are sticking with our recommendation and TP.

• Key risks: The entry of new competitors into the market, volatile raw material prices, slower-than-expected demand growth, and margins contraction.

Source: RHB Securities Research - 12 Feb 2020