Upgrade to BUY from Neutral, TP of MYR0.62 implies 14% upside and 4% FY19F yield. Luxchem’s FY18 results fell slightly below our expectation. FY18 PATAMI was at MYR38m (our estimate: MYR40.1m), marking a decline of 7%. Although topline was flat at MYR814m (+1% YoY), the drop in PATAMI stemmed from margin compression – its blended PBT margin fell 79bps to 6.1%. The PBT margin for its trading unit dropped by 33bps to 4%, while its manufacturing margin narrowed by 38bps to 15.1%. The company’s domestic market booked flat FY18 topline of MYR578m (FY17: MYR579m), at 71% of total sales. Its overseas sales performance continued to be underpinned by its Indonesia unit, where sales grew 7% YoY to MYR106m. That said, the Indonesia unit also recorded a negative bottomline contribution, due to a volatile IDR. A single-tier second interim DPS of 1.25 sen was proposed, bringing FY18 DPS to 2.25 sen – slightly better than our forecast of 2.1 sen.
Weaker QoQ. QoQ, 4Q18 revenue dropped 3% to MYR206m, as the manufacturing division’s higher sales (+11% QoQ to MYR43m) was offset by the decline in the trading segment (-6% QoQ to MYR163m). 4Q18 earnings decreased by 11% QoQ to MYR8.7m, due to lower margins. Luxchem’s blended PBT margin fell to 5.5% from 6.1% in 3Q18, as its manufacturing segment’s margin fell sharply to 10.3% from 17.6%. This was also insufficiently offset by the trading division’s PBT margin improving to 4.3%, vs 3Q18’s 3.5%. Higher operating expenses also added pressure on the company’s overall PBT.
Minor tweaks to our projections. We cut FY19-21F PATAMI by 2%/2%/5% after adjusting our estimates to incorporate FY18 figures. These forecasts are supported by the ramp-up in capacity in recent years and management’s drive to expand overseas sales. In this period, we also expect margins to begin stabilising.
Luxchem’s share price has retraced by 37% since hitting a record high of MYR0.89 in Sep 2017. Its share price (at 11.4X FY19F P/E) has reached a level that offers a relatively good risk-reward trade-off vis-a-vis the forecasted earnings trajectory – further supported by its dividend yield of 4%. Positive operating cash flow generation remains strong, while its balance sheet is relatively sturdy with a net cash position. Luxchem’s capex spending on its Pulau Indah warehouse is not expected to have any effect on its cash flow or balance sheet.
Source: RHB Securities Research - 18 Feb 2019