Hextar Global (HGB) reported a sequentially weaker 3QFY22 net profit of RM14.0m (+93.7% YoY, -8.8% QoQ), impacted by margin compressions due to volatile raw materials cost and lower average selling prices. While cumulative 9MFY22 net profit of RM44.9m (+76.8% YoY) only makes up 66% of our full-year estimates, we keep forecasts unchanged on expectation of stronger quarters ahead amid dissipating cost pressures. Steady prospects in the plantation industry and the continued application of agrochemicals, supported by the Group’s penetration in the specialty chemical space, will solidify earnings prospects of the Group. We continue to like HGB’s prospects, though we maintain our Neutral call given limited share price upside to our PE based target price of RM2.21 (at its 2-year historical mean of 40x).

• 3QFY22 highlights overview. The Agrochemical business was impacted by volatility in global commodity prices and lower selling prices, which led to subsequent margin compressions. Supply chain-driven cost increases also led to certain loss of business in Indonesia. More notable consolidation of contributions from its Specialty Chemicals businesses (acquired in 2021) mitigated more pronounced ill-effects however.

• The agriculture segment is HGB’s weak link this current quarter, with slippage in revenue (-10.8% YoY, -9.2% QoQ) coming as a result of the aforementioned challenges. We expect to see recoveries in the coming months amid dissipating supply chain-related pressures however, and growing traction from its intensified sales and marketing efforts.

• The specialty chemicals segment continues to make headway with sequential improvements in revenue seen (+164.2% YoY, +15.7% QoQ) on account of increasing industrial production and recovery in tourism related activities. The higher-margined nature of its products sees the segment now being a more significant profit contributor to the Group.

• The consumer products segment has not been able to turn around its business performance as yet despite a change in business direction, and the enlarging of its product range. Net losses have widened to RM2.0m for 9MFY22 on revenue of RM17.8m. Longer-term prospects are encouraging nonetheless, with improved consumer confidence expected to drive demand for its products.

• Recent developments. The Group has proposed to sell a manufacturing facility (on a sale and leaseback arrangement) to KIP Real Estate Investment Trust) for RM27m, and netting a pro-forma gain of RM4.3m in the process (to complete in 4QFY22). Separately, Dato’ Ong Choo Meng (Eddie) has relinquished his position as Executive Director of the Group to pursue other interests, though we expect that he will remain as an integral driver of the Group’s growth as a significant shareholder.

Source: PublicInvest Research - 30 Nov 2022