Luxchem Corp Bhd
(Feb 18, 55.5 sen)
Maintain buy with a target price of 62 sen: Luxchem Corp Bhd’s financial year 2018 (FY18) results fell slightly below our expectations. FY18’s profit after tax and minority interests (Patmi) was at RM38 million (estimated: RM40.1 million), marking a decline of 7%. Although top line was flat at RM814 million (+1% year-on-year [y-o-y]), the drop in Patmi stemmed from margin compression — its blended profit before tax (PBT) margin fell 79 basis points (bps) to 6.1%. The PBT margin for its trading unit dropped by 33bps to 4%, while its manufacturing margin narrowed by 38bps to 15.1%. The company’s domestic market booked flat FY18 top line of RM578 million (FY17: RM579 million), at 71% of total sales. Its overseas sales performance continued to be underpinned by its Indonesia unit, where sales grew 7% y-o-y to RM106 million. That said, the Indonesia unit also recorded a negative bottom-line contribution, due to volatile internal data resources. A single-tier second interim divident per share (DPS) of 1.25 sen was proposed, bringing FY18 DPS to 2.25 sen — slightly better than our forecast of 2.1 sen.

 
Quarter-on-quarter (q-o-q), 4QFY18 revenue dropped 3% to RM206 million, as the manufacturing division’s higher sales (+11% q-o-q to RM43 million) was offset by the decline in the trading segment (-6% q-o-q to RM163 million). 4QFY18 earnings decreased by 11% q-o-q to RM8.7 million, due to lower margins. Luxchem’s blended PBT margin fell to 5.5% from 6.1% in 3QFY18, as its manufacturing segment’s margin fell sharply to 10.3% from 17.6%. This was also insufficiently offset by the trading division’s PBT margin improving to 4.3% versus 3QFY18’s 3.5%. Higher operating expenses also added pressure on the company’s overall PBT.

We cut FY19-21F (forecast) Patmi by 2%/2%/5% after adjusting our estimates to incorporate FY18 figures. These forecasts are supported by the ramp-up in capacity in recent years and management’s drive to expand overseas sales. In this period, we also expect margins to begin stabilising.  Luxchem’s share price has retraced by the ramp-up in capacity in recent years and management’s drive to expand overseas sales. In this period, we also expect margins to begin stabilising.

Luxchem’s share price has retraced by 37% since hitting a record high of 89 sen in September 2017. Its share price (at 11.4 times FY19F price earnings) has reached a level that offers a relatively good risk-reward trade-off vis-a-vis the forecasted earnings trajectory — further supported by its dividend yield of 4%. Positive operating cash flow generation remains strong, while its balance sheet is relatively sturdy with a net cash position. Luxchem’s capital expenditure spending on its Pulau Indah warehouse is not expected to have any effect on its cash flow or balance sheet. — RHB Research Institute, Feb 18