HEXZA (3298) HEXZA CORP BHD Potential
COVID-19 Ethanol Based company potential!
Due to COVID-19, Ethanol have been in the market news for quite sometime. Ethanol have been extensively used in hand sanitisers and in disinfecttant. We have seen a surge in the purchase of ethanol for the usage for disinfecting cars, restaurants, doors and for use in offices. Due to the opening of the economy, the demand for ethanol had also been increasing day by day for disinfection of publicly used spaced! Car washes, restaurants, and even saundry shops now have a bottle of sanitiser in the front of their shops. And on top of that, they are required to sanitise the chairs , tables after each use. Barber shops are required to sanitise all the equipment after each use to prevent tranmission of viruses. Lifts in all condominiums have a dispenser which dispenses sanitisers after each use. Toilets in restaurants all have a bottle of sanitiser available at all times. Factories and construction sites now have a strticter regulation on the health of their workers as most of them are foreigners. LRTs , busses and all public transport are sanitised daily. Schools and universities are reopening with higher requirements and SOP as well.
The main ethanol producer in malaysia have seens a surge in ethanol orders since the begining of March as per article. The projection is that, additional demand would continue as a new norm of business and working starts in malaysia. Ethanol price, mainly in Malaysia only have surged by a factor of 50-200% over the months. Ethanol productions quota have been booked ahead for a year, and new customers are not accepted anymore. Scallability is much easier for producers, as all that is required to increase production is fermentation vats as this is a time based process. The distilliation tower is already there.
Even then with the ease of scalability there is a limit on production. For each order, a minimum downpayment deposit would have to be paid in order to secure the production slots due to the condition now. A recent friend of mine, have enquiries from United states for a minimum 100 tons/month and have yet to secure any supply of Ethanol. Also due to its nature, whereby ethanol is a controled chemical in Malaysia, it is difficult to import and hence there is a natural buffer against the world ethanol prices. Food grade ethanol commands a higher price and is used for hand sanitisers and sanitory products.
One of the main producer of ethanol in Malaysia, Hexza have the capacity to manufacture 9,000,000 liters a year, which is equivalent to about 7,110 metric tons a year. (Specific gravity 0.79 for Ethanol). From the article, there will be an increase of at least 75% sales compared to the average month. At this moment, based on information the whole production of ethanol of the remaining year have been booked. At a modest estimate of 50% increment in selling price in Malaysia, the price of ethanol would be around rm6.00-rm9.00 ringgit per liter. This would results in about (rm6.0->rm9.0) * 9million liters = rm 54 million to rm 81 million ringgit range in revenue. A banker/financer friend of mine posted a conservative estimate of the earning that for 2 quarters normal price and 2 quarters at rm 6.0 pricing. Meaning this is still conservative estimate.
He shared this with me. ((thanks J!!) This very conservative target price of Hexza would be around 2.08 based on PE Ratio of 15 only! Earning per share will jump from historically modest from 6 cents to 14 cents! While gloves and masks had been the main tool used to prevent transmission of the virus, sanitisers are being used more often. How many of people are out for work and are carrying a bottle of sanitiser each? When schools and factories are open the assumption is that the chemical would be used more often! Even without the virus, sanitisers would be a new norm now for cleaning in restaurants and public spaces. The ROE estimate would be around 15% with the additional sales booked. With all gloves companies, and even glove manufacturing companies trading at PE ratio >30, Hexza is still a rough diamond waiting to be polished.
In this time of economic downturn, the demand for this product will never diminish as it had become essential. There is still about 90% gained to be made. Due to the strong dividend paying history, if the overseas investment can be liquidated, there would possibly be a special dividend that can be made. This is a traditionally strong company, and now the reigns had been handed over to the new era's king and queens. Over the handover period, a very quick increase in net profit can be seen. The 1st and 2nd quarterly of 2020 have not been announced yet, and it can be a very good results at the end of this month, as the dateline is coming soon by 30th June.
Quick note: if you look at 2019 revenue for ethanol, seems like it did not reach the maximum potential that year. Estimate 7.2 million liters at old price of 4 ringgit
The Cheshire Cat
PS:ignore my wrong spellings. Disclaimer: invest at your own risk. I am not reponsible for any trades mades based on this article