This article first appeared in The Edge Financial Daily on June 21, 2018
Luxchem Corp Bhd
(June 20, 61.5 sen)
Maintain buy with an unchanged target price (TP) of 69 sen: To recap, Luxchem Corp Bhd’s profit after tax and minority interest for its first quarter of financial year 2018 (1QFY18) was 21% of our full-year forecast. While we continue to expect pricing competition in unsaturated polyster resin (UPR) segment to remain keen, in the near term, this potential negative impact may be offset by the start-up of the commercial production for a new 10,000-tonnes-per-annum UPR manufacturing capacity (bringing total installed capacity to 30,000 tonnes per annum), which may increase economies of scale, and the continuous rebound in the dollar/ringgit which would benefit Luxchem Corp, given about 25% of its revenue is generated from overseas sales.
The trading segment should also see demand normalise after posting a soft 1QFY18, partly supported by continued organic demand growth from the glove manufacturing sector (6%-7% annual volume growth).
Zero net gearing and absence of significant capital expenditure (capex) are seen to support dividend payout. Dividend payout for FY18 is expected to be consistent with the prior three-year range of 45%, translating into dividend per share of 2.4 sen, yielding 4%. This is supported by zero net gearing and the absence of significant capex on the horizon. The development of the reclaimed land on Pulau Indah, budgeted at around RM10 million (expected to be well covered by operating cash flow) is not expected to take place this financial year, as the reclaimed land still requires time to settle and the development plan is still a work in progress.
We maintain “buy” and an unchanged TP of 69 sen, which implies trading at 13 times FY18 price-earnings ratio forecast, on a fully diluted earnings per share of 5.3 sen. — RHB Research Institute, June 20