• Downgrade to NEUTRAL from Buy, revised MYR0.58 TP from MYR0.65, expected total return of -5%. Ahead of Luxchem Corp’s 1Q20 financial results, we revised our FY20F-22F earnings lower by between 7% and 11%. While the trading segment, anchored by better demand from the glove-making sector, is likely to see organic growth, the widespread and extended varying degrees of COVID-19 lockdowns across the globe over the past one month have exerted pressure on demand and margins for its manufacturing segment – hence the earnings revisions.

• Trading segment anchored by higher demand from glove sector. With listed glove-makers seeing higher plant utilisation rates on higher demand due to COVID-19, we expect Luxchem’s trading segment, which supplies raw materials to the glove sector, to improve its performance. This is even as other sectors were affected in the final two weeks of 1Q due to the enforcement of the first phase of the Movement Control Order (MCO) from 18 Mar to 31 Mar.

• Manufacturing segment unevenly affected. We understand that Luxchem Polymer Industries, its unsaturated polyester resin (UPR) manufacturing subsidiary, operated at 70% in 1Q due to the MCO and soft demand as its key markets have been undergoing varying movement restrictions. As for its other manufacturing subsidiary, Transform Master, plant utilisation was healthy at 85% for 1Q. Throughout the MCO period, the company has not experienced supply disruption.

• Unfavorable IDR movement a risk to earnings. The IDR/MYR plunged as much as 10% in 1Q20 vs 4Q19’s closing level. Based on the historical trend, the risk is high that its 70%-owned subsidiary in Indonesia could still be in the red in 1Q20, a situation compounded by slower activities due to COVID-19. However, at this juncture we are keeping our forecast for its Indonesian operations as we currently forecast a full-year loss of MYR1.7m vs MYR2.3m recorded in FY19.

• Pulau Indah warehouse construction temporarily suspended. The completion of the warehouse is expected to experience delay due to the MCO. The warehouse was initially targeted for completion in June. At this juncture, there are no cost overruns expected.

• Risks: Upside risks are a sharp V-shaped recovery in demand for its UPR products, better-than-expected margins and further strengthening of USD/MYR. Downside risks are a contraction in product margins and further depreciation of the IDR vs MYR.

Source: RHB Securities Research - 5 May 2020