• Maintain BUY with a new MYR0.65 TP from MYR0.59, 24% total expected return. Excluding a one-off item, FY19 core net profit of MYR38.2m accounted for 97% of our forecast – in line. Post results, we raise FY20F earnings by 3%, as we expect Luxchem Corp’s trading segment to benefit from higher demand from the glove-making sector – particularly in 1Q20 due to COVID-19. We also raise P/E to 14x from 13x, as we believe its significant overseas exposure is a plus, given the soft domestic economy.

• Topline lower on softer selling prices. FY19 revenue fell 6% to MYR765.5m on generally softer chemicals prices – this was despite volumes sold seeing organic growth. Gross profit fell by <1% to MYR80.4m – this was due to a higher blended margin of 10.5% in FY19 vs 10% in FY18. Excluding a one-off impact relating to a fire incident by Transform Master of MYR780,000 (impact before tax), core net profit improved by 1% to MYY38.2m. A second interim dividend of 1.25 sen was proposed, bringing FY19 DPS to 2.25 sen.

• The trading and manufacturing segments recorded a decline of 4.4% (MYR628m) and 12.6% (MYR137m) respectively due to lower product selling prices, which tracked the weak global chemical price trend. However, both segments saw better PBT margins of 4.2% (FY18: 4%) and 17.3% (FY18: 15.1%). While the reported export sales were at 31% of total revenue, we estimate that direct and indirect (particularly for the glove making sector) exports stood at c.55%.

• We raise our FY20F earnings by 3% to account for the higher demand from the glove-making sector, arising from the COVID-19 outbreak. Anchoring this view is that pressure on materials supply should ease in the coming weeks, as suppliers from China are resuming production on a staggered basis.

• Maintain BUY with a higher TP of MYR0.65 on a combination of higher FY20F earnings and P/E of 14x. The latter is due to Luxchem’s higher export market exposure, which should act as a hedge for the soft domestic economy. Its 14x P/E is still at a discount to the FBMSC’s 1-year forward P/E of 14.8x. Supportive of these are the company’s strong operating cash flow, low capex intensity, net cash balance sheet, as well as healthy and sustainable ROE.

Source: RHB Securities Research - 18 Feb 2020