AMINVESTMENT Bank Research has maintained its hold rating on Luxchem Corp Bhd and raised its FY20 net profit forecast by 6% and fair value (FV) by 6% to 56 sen from 53 sen based on 13x revised fully diluted (FD) FY20 earnings per share (EPS). 

“Luxchem’s FY19 results met our forecast and consensus estimates. The earnings upgrade is to reflect higher demand for chemicals used in the manufacture of gloves on the back of the Covid-19 outbreak. 

“Typically, glove-related sales make up less than 35% of Luxchem’s total turnover,” the research house said in a note on Feb 18.

Luxchem FY19’s turnover shrank 6% yoy as export sales fell by 8% yoy due to intensified competition in the export market, coupled with slowing demand for chemical products amidst a global economic slowdown.

However, core profit eased by only 1% yoy mainly due to better margins in construction-related products such as unsaturated polyester resin (UPR), paint/coating, PVC and others. 

The note also said construction-related sales make up less than 40% of Luxchem’s total turnover.

Nevertheless, RHB Research has maintained its buy rating on Luxchem with a revised target price (TP) of 65 sen from 59 sen, giving a 24% total expected return. 

“Excluding an one-off item, FY19 core net profit of RM38.2 mil accounted for 97% of our forecast – in line. Post-results, we raise FY20F earnings by 3%, as we expect Luxchem’s trading segment to benefit from higher demand from the glove-making sector – particularly in 1Q20 due to Covid-19,” it said in a note today (Feb 18).  

The research house also raises Luxchem’s EPS to 14x from 13x, as it believes the company’s significant overseas exposure is a plus, given the soft domestic economy.

Topline is lower on softer selling prices. FY19 revenue fell 6% to RM765.5 mil on generally softer chemicals prices despite volumes sold seeing organic growth. 

Gross profit fell by less than 1% to RM80.4 mil – this was due to a higher blended margin of 10.5% in FY19 vs 10% in FY18. 

Excluding a one-off impact relating to a fire incident at Transform Master of RM780,000 (impact before tax), core net profit improved by 1% to RM38.2 mil. A second interim dividend of 1.25 sen was proposed, bringing FY19 dividend to 2.25 sen.

The trading and manufacturing segments recorded a decline of 4.4% (RM628 mil) and 12.6% (RM137 mil) respectively due to lower product selling prices, which tracked the weak global chemical price trend. 

However, both segments saw better profit before tax (PBT) margins of 4.2% (FY18: 4%) and 17.3% (FY18: 15.1%). 

“While the reported export sales were at 31% of total revenue, we estimate that direct and indirect (particularly for the glove making sector) exports stood at around 55%.

“We raise our FY20F earnings by 3% to account for the higher demand from the glove-making sector, arising from the Covid-19 outbreak. Anchoring this view is that pressure on materials supply should ease in the coming weeks, as suppliers from China are resuming production on a staggered basis,” said the research house. 

The counter was last done at 57 sen at 12:15pm, giving it a market capitalisation of RM511 mil. – Feb 18, 2020


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