AmResearch starts coverage of Luxchem, says it’s a ‘buy’

PETALING JAYA: AmResearch has initiated its coverage on Luxchem Corp Bhd with a ‘buy’ recommendation and a fair value of RM2.74, underpinned by its sound financial standing and cash generative business.

The fair value implies an upside of 31% while dividend yield is decent at 4%.

Luxchem is a supplier of industrial chemicals that operates in two segments: trading and distribution of petrochemicals and other products related to rubber, latex, fibreglass reinforced plastics, coating, ceramic and polyvinyl chloride (PVC) industries; and manufacturing of unsaturated polyester resins and various specialty chemicals for the latex industry.

AmResearch expects Luxchem’s net profit to grow from RM43 million in FY16 to RM58 million in FY19, representing a three-year compound annual growth rate (CAGR) of 10%, premised on rising glove demand underpinned by stricter hygiene standards; good visibility from the PVC segment given the steady growth of intermediate inputs in the construction industry; and capacity expansions in the group’s manufacturing arms.

Luxchem has a diversified clientele of close to 1,000 customers. AmResearch said its large customer base mitigates the concern of supplier switching and excessive reliance on clients’ performance. In FY16, there was no single customer that contributed more than 10% of the group's revenue.

Currently, the group is striving to grow its export markets. “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),” said AmResearch.

As at end-March 2017, Luxchem was in a net cash position of RM15 million, which represents 4% of its total assets. Luxchem has consistently generated sufficient/excess cash flow from operations to finance its cash flow from investing.

Last Friday, the stock closed 10 sen or 4.8% higher at RM2.19 on 1.82 million shares done, for a market capitalisation of RM612.29 million.