RHB Research retains Buy on Luxchem, TP 62 sen

TheStar Thu, May 02, 2019 08:53am - 4 years View Original


RHB Research is retaining its Buy call on Luxchem with an unchanged target price of 62 sen.

RHB Research is retaining its Buy call on Luxchem with an unchanged target price of 62 sen.

KUALA LUMPUR: RHB Research is retaining its Buy call on Luxchem with an unchanged target price of 62 sen, (total return 23%), based on price-to-earnings (P/E) of 13 times on FY19F EPS of 4.7 sen.

It said on Thursday Luxchem’s 1Q net profit of RM9.6mil, flat YoY, met expectations at 23% of its full year forecast. 

“While activities in 2Q may be seasonally affected by the Aidil Fitri celebration – especially in Indonesia, we keep our numbers as activities should normalise in 2H,” it said. 

RHB Research said topline saw an organic improvement of 3% on the back of higher sales by the trading segment (RM171mil vs RM159mil in 1Q18), which offset the softer manufacturing revenue (RM31.5mil vs RM38mil). 

The latter is not a major concern as it was largely due to lower input costs translating into lower average selling price, while volume improved slightly. UPR plants capacity (40,000 tpa) utilisation for 1Q was at 65%. 

Profit before tax was flat at RM12.8mil due to lower blended profit before tax margin of 6.3% vs 6.5%; lower other operating income (mainly due to forex); and higher interest expenses (RM1.2m vs RM800,000 – mainly contributed by its Indonesian 70%-owned subsidiary), which offset the decline in share options related expenses (RM100,000 vs RM400,000). 

“Management guides that it is in the process of further debottlenecking Transform Master’s plant (a fully owned-subsidiary which was acquired in 2016). 

“Upon completion by end-2019, the plant’s capacity is expected to increase to 17,000tpa from 13,800tpa now. 

The plant is currently running at 80% of capacity. As for its plan to build a new warehouse at Pulau Indah, RM17mil has been allocated – not expected to impact borrowings – and a design plan has been submitted to the authority for approval. 

Building is expected to be completed in 2020. There is no plan to build additional unsaturated polyester resin (UPR) capacity as the company is working to optimise its current utilisation rate.
 
“We believe the stock is a candidate for a catch-up play. YTD, its share price has been flat and revisiting its December 2018 low, underperforming the FBMSC (+21%). 

“The stock is currently valued P/E of 11 times FY19F EPS, yielding 4% vs the FBMSC’s 13x and 2.2% respectively – suggesting room for relative valuation play. We expect the balance sheet to stay in a net cash position – further supported by positive cash flow generation. 
 
“Additionally, while the stock is not a perfect proxy play to the glove sector (around 30% of its revenue comes from the sector), the recent rebound in glove sector share prices and the industry’s expected organic volume growth of 5%-8% per annum, in our view, would provide some positive lift to the stock’s sentiment,” RHB Research said.
   
“While activities in 2Q may be seasonally affected by the Aidil Fitri celebration – especially in Indonesia, we keep our numbers as activities should normalise in 2H,” it said. 

RHB Research said topline saw an organic improvement of 3% on the back of higher sales by the trading segment (RM171mil vs RM159mil in 1Q18), which offset the softer manufacturing revenue (RM31.5mil vs RM38mil). 

The latter is not a major concern as it was largely due to lower input costs translating into lower average selling price, while volume improved slightly. UPR plants capacity (40,000 tpa) utilisation for 1Q was at 65%. 

Profit before tax was flat at RM12.8mil due to lower blended profit before tax margin of 6.3% vs 6.5%; lower other operating income (mainly due to forex); and higher interest expenses (RM1.2m vs RM800,000 – mainly contributed by its Indonesian 70%-owned subsidiary), which offset the decline in share options related expenses (RM100,000 vs RM400,000). 

“Management guides that it is in the process of further debottlenecking Transform Master’s plant (a fully owned-subsidiary which was acquired in 2016). 

“Upon completion by end-2019, the plant’s capacity is expected to increase to 17,000tpa from 13,800tpa now. 

The plant is currently running at 80% of capacity. As for its plan to build a new warehouse at Pulau Indah, RM17mil has been allocated – not expected to impact borrowings – and a design plan has been submitted to the authority for approval. 

Building is expected to be completed in 2020. There is no plan to build additional unsaturated polyester resin (UPR) capacity as the company is working to optimise its current utilisation rate.
 
“We believe the stock is a candidate for a catch-up play. YTD, its share price has been flat and revisiting its December 2018 low, underperforming the FBMSC (+21%). 

“The stock is currently valued P/E of 11 times FY19F EPS, yielding 4% vs the FBMSC’s 13x and 2.2% respectively – suggesting room for relative valuation play. We expect the balance sheet to stay in a net cash position – further supported by positive cash flow generation. 
 
“Additionally, while the stock is not a perfect proxy play to the glove sector (around 30% of its revenue comes from the sector), the recent rebound in glove sector share prices and the industry’s expected organic volume growth of 5%-8% per annum, in our view, would provide some positive lift to the stock’s sentiment,” RHB Research said.

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