KUALA LUMPUR (July 30): AmInvestment Bank Bhd said today it believes the Covid-19 pandemic cuts both ways for Luxchem Corp Bhd as the surge in demand for personal protective equipment such as rubber gloves will drive Luxchem's latex and nitrile processing and compounding businesess but hurt demand for chemicals from sectors like the construction, automobile and electrical industries.
In a note today, AmInvestment analysts wrote that the latex and nitrile processing and compounding segment contributes to about 35% of Luxchem's turnover for the financial year ended Dec 31, 2019 (FY19).
"Luxchem noticed a significant pickup in orders for most of its chemicals post the MCO (Movement Control Order). However, it is cautious that these could just be spikes as customers rebuild their inventory (or in other words, recurring orders still depend on sustained economic recovery).
"Despite the improved orders, margins for the trading segment remain soft as suppliers (Luxchem included) are still stuck with build-up stock of chemicals during the lockdown," the analysts said.
AmInvestment included in the note today key highlights from Luxchem's briefing yesterday. Luxchem also announced its results for the second quarter of FY20 (2QFY20) yesterday.
In Bursa filings yesterday, Luxchem said 2QFY20 net profit fell to RM7.57 million from RM9.89 million a year earlier. For the cumulative first half of FY20 (1HFY20), Luxchem said net profit was lower at RM17.55 million versus RM19.49 million a year earlier.
Despite reporting a lower net profit, Luxchem declared an interim dividend of one sen per share, which will be paid on Sept 30, 2020.
Today, AmInvestment said Luxchem's 1HFY20 results met expectations at 47% and 49% of AmInvestment's and consensus full-year forecasts respectively.
"We maintain our forecasts, but raise our fair value for Luxchem by 9% to 63 sen (versus 58 sen previously) based on 14x FY21F EPS (versus 13x previously) as we now value the stock at a 2x multiple premium to its average historical forward P/E of 12x (versus 1x multiple premium previously).
"This is to reflect the improved trading sentiment towards glove-related stocks (Luxchem is engaged in latex and nitrile processing/compounding) on expectations of a prolonged Covid-19 pandemic," AmInvestment said.
According to AmInvestment, Luxchem during the briefing yesterday indicated that its unit Transform Master Sdn Bhd, which is engaged in latex and nitrile processing and compounding, completed its capacity expansion by one-third from 1,500 tonnes a month to 2,000 tonnes in June 2020.
"At present, it operates at about 75% capacity. Luxchem guided for higher orders to come in 2HFY20 or early FY21 in tandem with the commissioning of new capacity of several glove players.
"Production of unsaturated polyester resin (used largely in the construction, automobile and electrical industries) under Luxchem Polymer Industries is expected to remain stable at 40,000 tonnes/annum, translating into a utilisation rate of 70%-75% for FY20 (versus ~75% historically)," AmInvestment said.
Today, Luxchem's share price closed down two sen or 2.42% to 80.5 sen for a market capitalisation of RM721.13 million. The stock saw some 30.02 million shares traded.