Luxchem Corp Bhd
(Feb 18, 57 sen)
Maintain buy with a higher target price of 65 sen: Our financial year 2020 forecast (FY20F) earnings for Luxchem Corp Bhd are raised by 3%, as we expect Luxchem’s trading segment to benefit from higher demand in the glove-making sector, particularly in the first quarter of 2020 due to the Covid-19 outbreak.

Our price-earnings (PE) are also raised to 14 times from 13 times, as we believe the company’s significant overseas exposure is a plus, given a soft domestic economy.

Its revenue for financial year ended Dec 31, 2019 (FY19) fell 6% to RM65.5 million on generally softer prices of chemicals, despite an organic growth in volumes sold. Its gross profit fell less than 1% to RM80.4 million due to a higher blended margin of 10.5% in FY19 versus 10% in FY18.

Excluding a one-off impact relating to Transform Master Sdn Bhd’s fire incident of RM7.8 million (before tax), Luxchem’s core net profit improved 1% to RM38.2 million. A second interim dividend of 1.25 sen was proposed, bringing its FY19 dividend per share to 2.25 sen.

The trading and manufacturing segments declined 4.4% to RM628 million and 12.6% to RM137 million respectively due to lower product selling prices, tracking the weak global chemical price trend. However, both segments’ profit before tax margins improved to 4.2% versus FY18’s 4% and 17.3% against FY18’s 15.1% respectively.

While reported export sales were at 31% of total revenue, we estimate direct and indirect, particularly for the glove-making sector, exports stood at about 55%.

Luxchem’s 14 times PE is still at a discount to the FBM Small Cap Index’s one-year forward PE of 14.8 times. These are supported by the company’s strong operating cash flow, a low capital expenditure intensity, a net cash balance sheet, and a healthy and sustainable return on equity. — RHB Research Institute, Feb 18