Investment Highlights

• We increase our FY20–22F net profit forecasts by 15%, 26% and 26% respectively, and raise our fair value by 25% to RM0.79 (vs. RM0.63 previously) based on 14x FY21F EPS, valuing the stock at 2x multiple premium to its average historical forward P/E of 12x. This is to reflect the improved trading sentiment towards glove-related stocks (Luxchem is engaged in latex and nitrile processing/compounding) on expectations of a prolonged Covid-19 pandemic. Maintain SELL as valuations are rich.

• Luxchem’s 9MFY20 results came in above expectations, accounting for 80% and 79% of our full-year forecasts and fullyear consensus estimates respectively. We believe the variance against our forecast came largely from much stronger margins underpinned by: (1) a strong recovery in prices of chemical products carried by its trading segment; and (2) better economies of scale at the manufacturing segment, at both latex compounding and production of unsaturated polyester resin (UPR) on increased volumes. The latex compounding unit is operating at 85% of its capacity (expanded capacity of 2,000 MT/month since July, vs. 75% previously at 1,500 MT/month), while the UPR production unit saw utilisation rate hitting above 90% vs. about 70% three months ago. We have reflected these in our revised forecasts.

• The group’s 9MFY20 turnover shrank 13% YoY due to lower sales for most of its chemical products (except latex) during the movement control order (MCO) period.

• However, its core net profit improved by 8% YoY, we believe, as Luxchem benefited from inventories acquired at low prices prior to the strong recovery in prices of chemical products in 3Q. Meanwhile, the manufacturing segment also recorded improved margins, we believe, mainly due to better economies of scales on higher production as mentioned.

• We believe Luxchem has shrugged off the pandemic. The demand for chemical products has recovered as economies reopen (and increasingly the thinking has been that protecting livelihood is as important as protecting lives). Meanwhile, the demand for personal protective equipment such as gloves will continue to drive Luxchem’s latex and nitrile processing/compounding businesses (the segment contributes about 35% of its turnover in FY19).

• However, based on the last traded price, at 15–16x forward earnings for a small-cap manufacturing company, we believe the upside is capped.

Source: AmInvest Research - 28 Oct 2020