While Hextar Global (HGB) reported a sequentially stronger 1QFY23 net profit of RM8.6m (+85.9% QoQ), it fell considerably short of estimates at only 12% of our full-year numbers. The weaker performance on a YoY basis (-45.5%) is attributed to notably weaker selling prices of key herbicides which is believed to have slumped close to 30% in some instances, coupled with customers adopting a “wait-and-see” attitude in anticipation of lower selling prices in the future. Given the weaker global economic environment, we are compelled to cut FY23-FY25 estimates by 11% on average (more notably in FY23) to account for the weaker demand and lower selling prices. While longer-term prospects in the plantation industry and the continued application of agrochemicals remain encouraging, complemented by its exposure in the specialty chemicals space, we retain our Neutral call on the stock given these near term operating challenges. Our PE-based target price is lowered to RM0.63 as result of the earnings cut.
- Agriculture segment revenue contributions saw a drop (-15.5% YoY to RM81.7m) due to the aforementioned lower selling prices of key herbicides, as demand was also affected by customers holding back on orders. While longer-term contributions will remain encouraging, underpinned by steady outlook in the global plantation industry, near-term performance will be weighed by volatile price and demand pressures as a result of the uncertain external environment.
- The specialty chemicals segment recorded encouraging revenue growth (+11.3% YoY to RM57.1m), lifted by stronger contributions from the oil and gas industry which negated waning contributions from the rubber glove industry as plant utilization rates in the latter remained low. Net profit (before minority interest) contributions fell 18.2% YoY to RM8.0m due largely to higher operating expenses.
- The consumer products segment failed to make headway despite numerous attempts to turn it around. Revenue contributions fell to RM4.6m (-18.7% YoY, -19.3% QoQ) while net losses widened to RM1.5m (+121.5% YoY, -22.6% QoQ).
- Recent developments. HGB embarked on a fresh round of corporate exercises following a period of lull, with the recent announcement of various transactions which are anticipated to be earnings accretive, albeit not as significant as the acquisitions undertaken in 2021. (Please refer to our report dated 16 May 2023 for details on the transactions). Cumulative benefit to net profit is expected to be ~RM6.6m, based on 2022 numbers, though we err on the side of conservatism and are not accounting for these at this juncture. The moves will see HGB exiting the consumer product space to be fully focused on its core chemicals businesses.
Source: PublicInvest Research - 22 May 2023