Wednesday, October 25, 2017

FW: AmBank Research - Luxchem Corp : Mulling further capacity expansion BUY, 25 Oct 2017




Luxchem Corp : Mulling further capacity expansion          BUY


We reiterate our BUY recommendation on Luxchem Corporation (Luxchem) with an unchanged fair value of RM0.91/share, based on 15x FY18F FD EPS. We have trimmed our FY17F earnings 18% following a disappointment in the 9MFY17 results. However, positive prospects of the company remain intact.

Luxchem recorded a net profit of RM9mil in 3QFY17, representing a slight QoQ improvement of 4%, but a decline of 10% YoY. For the cumulative period (9MFY17), the group's net profit inched up 4% YoY on the back of an 18% YoY expansion in revenue. The 9MFY17 came in below both our expectations and consensus at 63% and 66% of FY17F's full-year forecasts.


The results’ disappointment stemmed from a lower-than-expected improvement in 3QFY17's pre-tax margin, which increased 0.8ppt from 5.8% in 2QFY17 to 6.5% in 3QFY17. We had earlier expected improvements of a bigger quantum due to a recovery in chemical prices, including those of butadiene and unsaturated polyester resins (UPR). However, management said that the increase in the public reference price of chemical products was not well received by the market.


On a positive note, we gather that the revenue synergies from its newly acquired Transform Master (TMSB) were fruitfully unlocked, evidenced by a quick capacity fill-up from 80% utilisation in 1HFY17 to full capacity currently. In light of this, management has indicated that the group is considering expanding TMSB's capacity further within the next two years (on top of the 2.4kt/year that is coming onstream by year-end). We view this positively as TMSB's products are largely sold to glove companies, which are experiencing sturdy growth.




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