STOCK FOCUS OF THE DAY
Luxchem Corp : Recovery in chemical prices to boost margins BUY
We reiterate our BUY recommendation on Luxchem Corporation (Luxchem) and revise our fair value to RM0.91/share from RM2.74/share to account for the effect of the 1-into-3 share split, which was completed on 8 September 2017. The fair value is based on 15x FY18F FD EPS, on par with the industry P/E.
From our channel checks, chemical prices in general have been recovering since August. Butadiene prices have trended up for six consecutive weeks from US$915/MT to US$1,555/MT currently while prices of other related raw materials such as PVC resins and styrene have also recovered since August. The chemical products mentioned are used in the production of some of Luxchem's trading products such as nitrile latex and styrene-butadiene rubber. As such, we believe earnings will pick up sequentially in 3QFY17 on the back of better trading margins. This would make up for the earnings shortfall in 2QFY17 that stemmed from a sharp drop in chemical prices in 1HFY17.
On another note, management said that the new facilities being built for capacity expansions at Luxchem Polymer Industries (LPI) and Transform Master (TMSB) are on track to be completed by the end of FY17. The group is striving to grow its export markets, especially the higher growth regions like Indonesia and Vietnam. Management's effort is already coming to fruition evinced by a CAGR of 19% in its export revenue from FY13 to FY16, outpacing the growth of its domestic sales (7% CAGR).
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