AmInvest Research ups Luxchem fair value, higher earnings ahead

Luxchem Corporation's share price fell 17 sen to RM2.05 afteer Q2 earnings fell about one-third to RM8.65mil

KUALA LUMPUR: AmInvestment Bank Research is retaining its Buy call on Luxchem Corporation and revised its fair value to 91 sen a share as it views higher earnings ahead.

“The fair value is based on 15 times FY18F fully diluted EPS, on par with the industry price-to-earnings (P/E),” it said on Wednesday. On Sept 8, Luxchem completed a one-into-three share split and the share price at that time was RM2.74.

AmInvest Research said from its channel checks, chemical prices in general have been recovering since August.

Butadiene prices have trended up for six consecutive weeks from US$915 a tonne to US$1,555 currently while prices of other related raw materials such as PVC resins and styrene have also recovered since August. 

“We note that 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,” it said.

 AmInvest Research said 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. Currently, the two subsidiaries are running at 85% and 75% capacity respectively. 

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). 

AmInvest Research said it likes Luxchem because of its:  

i) good earnings visibility backed by large clientele (1,000 customers) and wide applications of its chemical products; 

ii) exposures in industries with stable and commendable growth such as its latex and PVC segments, the demand of which is tied to the glove and construction sectors respectively; and  

iii) capacity expansions in the group's manufacturing arms, LPI (+33%) and TMSB (+25%).