This article first appeared in The Edge Malaysia Weekly on November 20, 2017 - November 26, 2017

SAMCHEM Holdings Bhd is back on fund managers’ radar after the company posted a 94% year-on-year jump in net profit to RM6.313 million in the quarter ended Sept 30. Revenue surged 42% y-o-y to RM242.62 million.

Against this backdrop, the group’s share price closed at 97.5 sen last Friday, giving it a market capitalisation of RM265.2 million.

But some may argue that the regional petrochemical distributor could be worth much more.

“Our investments abroad are finally starting to mature ... Indonesia and Vietnam. This year, we are comfortably on target to generate RM900 million in turnover. Next year? We should be able to exceed RM1 billion in turnover,” says founder and executive chairman Ng Thin Poh.

For the nine months ended Sept 30, the group booked RM14.7 million in net profit on revenue of RM676.18 million, up 28% and 40% y-o-y respectively.

Assuming the group maintains its third-quarter performance, it should easily be able to hit Ng’s targets.

“Our revenue has been driven by increased demand across the board. We are highly diversified and not reliant on any one product or client. Growth has been driven by new customers and increased demand from existing ones,” explains Ng.

So, what does Samchem do?

It may be easy to simplify Samchem’s business as a regional petrochemical distributor. In a nutshell, it procures, warehouses and distributes various petrochemical products.

But a closer look reveals that the group has positioned itself as an integral part of the broader manufacturing supply chain.

“Our principals are the top petrochemical companies in the world like Petronas Chemicals from Malaysia, Shell Chemicals from the Netherlands, ExxonMobil from the US and BASF from Germany,” says Ng.

“Along with other principals, we are able to supply over 500 different types of chemicals that are crucial for manufacturing. And across the region, we service over 6,000 customers.”

From paints and automotive lubricants to mattresses, Samchem is able to source most raw inputs. In short, if a manufacturing process requires chemicals, Samchem can supply it.

“The only area we are currently not involved in is food processing and edible products,” says Ng.

The range of products is not Samchem’s only strength. It would not be fair to peg it as a mere chemical trader — a company that simply buys and sells.

“It is not easy to secure distributorship rights from our principals. They put us through stringent checks, like health and safety,” says Ng.

On top of meeting the strict requirements, the group has also invested in physical infrastructure that gives its distribution network a sizeable reach in the region.

It currently operates out of Malaysia, Singapore, Indonesia, Vietnam and Cambodia. Looking ahead, Ng plans to expand into Myanmar and the Philippines, positioning the company as one of the major chemical distributors in Asean.

“When we look at Malaysia alone, there is a limit to how much we can grow. To continue growing, we must expand abroad. We have strong support from our principals to expand abroad. They like working with us and want to work together to expand into these countries,” explains Ng.

However, it has not been an easy journey. Samchem ventured into Vietnam in 2006 and into Indonesia in 2010. Expansion into both countries were fraught with challenges, says Ng.

“We made mistakes along the way, but we also learnt from them. Now, when we look to venture into the Philippines and Myanmar, we know how to plan accordingly,” he says.

The cost of the ventures is reflected in the group’s lacklustre earnings in the last few years. The fall in crude oil prices in 2015 did not help either. But having weathered the difficult initial phase of the ventures abroad, Samchem is starting to reap the fruits. Today, Samchem is one of only three major petrochemical distributors in both Indonesia and Vietnam.

For the third quarter, its Indonesian revenue rose 43% y-o-y to RM32.88 million, although profit before tax halved to RM540,000. Meanwhile, its Vietnamese operations saw revenue rise 65% y-o-y to RM75.38 million, driving profit up 25% to RM3.39 million.

Samchem wholly owns the Indonesian operations and has a 63% stake in the Vietnamese business.

A quick look at Samchem’s balance sheet reveals RM48.4 million in cash against RM164.3 million in debt, giving it a net gearing of 0.885 times.

However, this may not truly reflect the group’s gearing. Over 98% of its debt is short term, used as working capital to facilitate inventory stocking.

“Almost all of our debt is for trade financing. We need to ensure that we have enough stock on hand to meet our clients’ needs. Some of these products take a month or two to be delivered, and our customers can’t wait so long,” explains Ng.

In fact, he says, the group currently has no plans to make a cash call despite the expansion plans.

“Some funds have approached us, but we are not considering a private placement at this time,” says Ng. “We should be able to fund our capital expenditure plans with internally generated funds now that our Vietnamese and Indonesian operations are performing.”

There is, however, one caveat. Ng is actively looking for merger and acquisition (M&A) opportunities. And if the right opportunity presents itself, the group may raise funds for it.

“I believe the industry is ripe for consolidation. The smaller players are slowly losing competitiveness. And there will be opportunities for us to acquire the business; not the company, the business,” says Ng.

On M&A, he says, “I have been approached to sell the company before. But I can tell you, I have absolutely no intention to sell. I want to continue growing this business that I have built over the past 28 years.”

On a separate note, Samchem is expanding its footprint in Malaysia. It has acquired a piece of land in Westports and is building a new facility that will become its new headquarters. Including land cost of RM12 million, the facility is expected to cost RM30 million.

The company can easily fund the expansion by disposing of its current headquarters in Shah Alam, Selangor, says Ng.

He estimates that the capex for the Vietnam and Indonesia operations will be relatively small — about US$500,000 (RM2.08 million) for Vietnam and US$500,000 to US$800,000 for Indonesia — and unlikely to disrupt dividend payouts.

“Now, we have operations in Jakarta, Surabaya and Medan. We plan to expand to Kalimantan ... Pontianak,” he adds.

For investors eager to take a position in Samchem, however, there is one hurdle that even the fund managers are facing — liquidity. The stock appears to be tightly held, making it difficult to acquire. The group’s average daily trading volume is around 733,000 shares.

For fund managers at least, a private placement may be the most realistic way to pick up a meaningful position.

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