This article first appeared in The Edge Financial Daily on August 1, 2019
Luxchem Corp Bhd
(July 31, 52.5 sen)
Maintain buy with a lower target price (TP) of 61 sen: Our TP reflects 13 times price-earnings (P/E) on financial year ending 2019 forecasts (FY19F) earnings per share (EPS) of 4.7 sen, as we imputed Luxchem Corp Bhd’s faster-than-expected employee share option scheme (Esos) exercise, which lapses in November. The company’s first half of financial year 2019 (1HFY19) core earnings are in line, at 47% of our full-year forecast. This was from a combination of better margins, favourable forex and the absence of Esos expenses in the second quarter (2QFY19). The management declared an interim tier-1 dividend of one sen.
Luxchem’s 1HFY19 revenue dipped 1% year-on-year (y-o-y) to RM391 million on lower contributions from manufacturing (-13% y-o-y at RM65 million), while the trading segment grew marginally by 1% (RM326 million). Profit after tax and minority interests improved by 1% to RM19.5 million, on a better blended profit before tax (PBT) margin of 6.7% in 1HFY19 versus 6.5% in 1HFY18. The higher overall PBT margin was due to significant improvement in the manufacturing segment, which registered a 349-basis-point (bps) PBT margin improvement to 20%. This helped to offset the 20bps drop in its trading margin (1HFY19: 4%). Luxchem’s Malaysian operation’s revenue fell 5% to RM273 million, primarily due to the softer trading segment’s performance, while its Indonesian business recorded a 22% improvement in turnover to RM59 million — which could have been better if not for seasonal factors, such as Aidilfitri festive season, in 2QFY19.
Quarter-on-quarter, revenue declined by 7% to RM188 million due to the weaker trading segment (RM155 million in 2QFY19 versus RM171 million in 1QFY19) which offset the manufacturing division’s improvement (RM34 million in 2QFY19 versus RM32 million in 1QFY19). We maintain our forecasts as we expect 2H operations to normalise from the Aidilfitri season in 2Q.
The stock has been trading flat year to date, and revisiting its December 2018 low, underperforming the FBM Small-Cap Index (+21%). Luxchem is trading at 11 times P/E of FY19 EPS and with a 4% yield, which we deem as slightly cheap. It is expected to maintain its net cash position — further supported by positive cash flow generation. — RHB Research Institute, July 31