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This article first appeared in The Edge Financial Daily, on December 1, 2015.

 

Hexza Corporation Bhd

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HEXZA offers investors an attractively priced exposure to two fast growing sectors that are major beneficiaries from the depreciating ringgit — wood products and pharmaceuticals — with low valuations and stable dividends. 

Established since 1969, Hexza (Fundamental: 1.45/3, Valuation: 2.6/3) manufactures adhesive resins used by the plywood, chipboard and furniture industry. It also produces ethanol for the pharmaceutical industry. Both divisions contribute 61% and 39%, respectively, to overall revenue.   

Furniture and wood based stocks, which are trading at  trailing P/E of 8-17 times, have seen their prices up 100%-250% this year. Meanwhile, pharmaceutical stocks have risen some 40%-110% and are trading at 16-19 times trailing P/E. 

By comparison, Hexza trades at an attractive single digit trailing ex-cash P/E of 6.5 times, despite a 36.6% rise in its share price this year. To be fair though, Hexza’s margins will be affected by the ringgit’s depreciation due to higher import costs, as its end products are sold locally. Over time though, margins should usually normalise.  

In its latest 1QFYJune2016, net earnings jumped 89.7% y-y to RM7.9 million. Excluding a forex gain of RM4.7 million though, net earnings fell 23% due to higher raw material costs arising from the weaker ringgit. Nonetheless, this will be mitigated by the closure of a non-profitable subsidiary and additional annual lease income of USD1.6 million from a new power generation business in Myanmar that will last over 10 years. 

Hexza has a strong balance sheet with net cash of RM60.9 million as at end-September 2015. This amounts to 30.4 sen per share, or 34.5% of its current market capitalisation.  Dividends stood at 4 sen per share from FYJune2011-2014 and rose to 4.5 sen for FY2015, giving a decent yield of 5.1%. Its balance sheet will strengthen further next year. A subsidiary — Norsechem Resins Sdn Bhd, will dispose its land and buildings by March 2016 for RM17 million cash.  

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