This article first appeared in The Edge Financial Daily on October 29, 2019

Luxchem Corp Bhd
(Oct 25, 48 sen)
Downgrade to hold with a lower fair value (FV) of 53 sen: We downgrade our “buy” recommendation to “hold” on Luxchem Corp Bhd with lower forecasts and lower FV of 53 sen per share (versus 64 sen per share previously), pegged at financial year forecast 2020 (FY20F) fully diluted price-earnings ratio of 13 times.

Luxchem’s third quarter of financial year 2019 (3QFY19) results came in below our expectations at RM8.9 million, bringing nine months of financial year 2019 (9MFY19) results to RM28.1 million. The results account for 69% of our full-year forecasts and consensus full-year estimates.

9MFY19 core profit slid by 4% due to lower local sales and deteriorated trading and manufacturing margins. Margins were squeezed despite the US dollar strengthening against the ringgit by 4% year-on-year (y-o-y)  which would have benefited Luxchem due to 30% of its exports being US dollar-denominated. However, margins were dragged by lower average selling prices of chemicals which brought down sales.

Meanwhile, Luxchem’s 9MFY19 revenue decreased by 5% as export sales rose by 4% while local sales fell by 8%. Indonesia remains the group’s largest export market, growing 12% y-o-y.

On a quarterly basis, 3QFY19 core profit and revenue declined by 6% and 1% quarter-on-quarter respectively due to margin compressions in both the trading and manufacturing segments as aforementioned.

Update on the progress of its manufacturing arms: i) Luxchem Polymer Industries (LPI) in the unsaturated polyester resin (UPR) industry: Competition is still a main concern for this industry, with utilisation rates still unchanged at around 70% of LPI’s 40,000 tonnes per annum capacity; and ii) Transform Master Sdn Bhd (TMSB) in the latex industry: The production is operating at nearly full utilisation rate with capacity remaining at 13,800 tonnes per annum. The group’s plan to increase TMSB’s capacity to 18,000 tonnes per annum by 3QFY19 has been delayed due to warehouse and labour constraints, with expansions slated to be completed by the end of 2019.

Luxchem is in a net cash position of RM118 million with no borrowings and net assets per share of 29 sen. Moving forward, 4QFY19 is expected to be flattish while for 2020, the group intends to continue its strategy of export-led growth and focus on improving margins by increasing the utilisation rates and efficiencies of its manufacturing arms, LPI and TMSB.

We are cautious about Luxchem due to: i) challenging market conditions despite its exposure to the glove sector that has commendable growth prospects; and ii) deteriorating margins in its UPR manufacturing arm, LPI as it continues to face intense competition. This is despite Luxchem’s large clientele of approximately 1,000 customers and wide application of its chemical products, and also its sustained capacity expansions planned for its manufacturing segment, particularly that of its latex-related arm TMSB. — AmInvestment Bank, Oct 25