This article first appeared in The Edge Financial Daily on May 3, 2019

Luxchem Corp Bhd
(May 2, 53 sen)
Maintain buy with unchanged target price of 62 sen: Luxchem’s top line saw an organic improvement of 3% on the back of higher sales by the trading segment (RM171 million versus RM159 million in 1QFY18), which offset the softer manufacturing revenue (RM31.5 million versus RM38 million).

The latter is not a major concern as it was largely due to lower input costs translating into lower average selling price, while volume improved slightly. Unsaturated polyester resin (UPR) plants capacity (40,000 tonnes pa [tpa]) utilisation for 1Q was at 65%.

Pre-tax profit was flat at RM12.8 million due to lower blended pre-tax profit margin of 6.3% versus 6.5%, lower other operating income (mainly due to foreign exchange); and higher interest expenses (RM1.2 million versus RM800,000 — mainly contributed by its Indonesian 70%-owned subsidiary), which offset the decline in share options-related expenses (RM100,000 versus RM400,000).

The management guides that it is in the process of further debottlenecking Transform Master’s plant (a fully-owned subsidiary which was acquired in 2016). Upon completion by end-2019, the plant’s capacity is expected to increase to 17,000 tpa from 13,800 tpa now. The plant is currently running at 80% capacity.

As for its plan to build a new warehouse in Pulau Indah, a budget of RM17 million has been allocated — not expected to impact borrowings — and a design plan has been submitted to the authorities for approval. Construction is expected to be completed in 2020. There is no plan to build an additional UPR capacity as the company is working to optimise its current utilisation rate.

We believe the stock is a candidate for a catch-up play. Year to date, its share price has been flat and revisiting its December 2018 low, underperforming the FBM Small Cap Index (FBMSC). The stock is currently valued at PE of 11 times FY19F EPS, yielding 4% versus the FBMSC’s 13 times and 2.2% respectively — suggesting room for relative valuation play. We expect the balance sheet to stay in a net cash position — further supported by positive cash flow generation.

Additionally, while the stock is not a perfect proxy play to the glove sector (around 30% of its revenue comes from the sector), the recent rebound in glove sector share prices and the industry’s expected organic volume growth of 5% to 8% per annum, in our view, would provide some positive lift to the stock’s sentiment. — RHB Research Institute, May 2