Luxchem (1)

Good Company. But No Hurry To Rush In

Publish date: Sun, 4 Jan 2015, 03:55 PM 

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1. Principal Business Activities


Luxchem is involved in manufacturing and trading of Unsaturated Polyester Resin("UPR"), synthetic rubber and other industrial chemicals.


For FY2013, trading and manufacturing accounted for 66% and 33% of net profit respectively.


The group's customers use its products to manufacture a wide variety of plastic products such as waterproof materials, bath tub, automotive components, table top, boats, etc.


The company was listed on Bursa in 2008. 




2. Consistent Profit Track Record


The company has been consistently profitable even during 2008 and 2009 (global financial crisis).

								9 months
(RM mil)	2007	2008	2009	2010	2011	2012	2013	2014
Revenue	299.4	331.6	305.3	399.8	498.9	496.9	524.9	456.4
EBITDA	23.4	27.0	26.8	29.4	32.0	31.2	28.3	24.0
Net profit	15.3	18.0	19.1	20.5	22.7	22.0	19.6	15.7
DPS (sen)		5.0	7.0	8.0	9.0	8.5	8.0	3.0
Div yield (%) ^		3.1	4.4	5.0	5.6	5.3	5.0	1.9
EBITDA (%)	7.8	8.1	8.8	7.4	6.4	6.3	5.4	5.3
Net (%)	5.1	5.4	6.3	5.1	4.6	4.4	3.7	3.4
^ based on pre bonus share price of RM1.60

However, earnings growth is a bit slow.


The stock has just completed 1 for 1 bonus issue. Share price adusted downwards by 50% and is currently trading at 82 sen. 





The company has market cap of RM210 mil (based on 260 mil shares and RM0.81).


Based on 12 months cumulative net profit of RM21.6 mil, PER is 9.7 times.


The group has net assets of RM156 mil, interest bearing debts of RM77 mil (bankers' acceptance) and cash of RM76 mil. Almost zero net gearing.




3. Sales Are Mostly Domestic Oriented


According to 2013 annual report, almost 77% of its sale are to domestic customers.

	FY2013	Revenue
	(RM mil)	(%)
Malaysia	403.2	76.8
Vietnam	55.9	10.6
Indonesia	36.0	6.9
Singapore	9.6	1.8
Thailand	7.0	1.3
Hong Kong	4.2	0.8
Bangladesh	3.0	0.6
Others	6.1	1.2
TOTAL	525.0	100.0

4. Expansion of Production Facility


According to FY2013 annual report, the group has completed expansion for its UPR plant in Q1 2014. Production capacity has been increased by 50% from 20,000 MT to 30,000 MT. By end 2014, the group expects to operate at 75% capacity.


In FY2013, the manufacturing division contributed 30% of its net profit (RM6.4 mil of RM19.4 mil). On pro forma basis, the increase of production capacity by 50% should result in approximately 15% increase in net profit.


In normal time, this piece of good news could be a catalyst for re-rating. However, as mentioned in my previous articles, due to the weak Ringgit and lower oil price, I am wary of Malaysia's economic prospects for 2015.


As the bulk of Luxchem's products are sold to domestic customers, in the event of economic downturn, Luxchem's sale will be adversely affected.  


In this regard, I will choose to ignore this positive development and not rush in to take position.




5. Concluding Remarks


Over the past few months, oil price has come down substantially. Since Luxchem uses petroleum based products as raw materials, I am interested to find out whether the group's profitability will improve substantially gong forward.


However, upon completion of the study, I am of the view that the group is unlikely to benefit from the lower raw material cost. UPR is a commodity type products. The group's customers are likely to request for the cost saving to be passed through to them by lowering of sale price.


As the group only exports 23% of its products, it will not benefit much from the weak Ringgit.


Conversely, there is a risk that their sale will be adversely affected in the event of down turn in Malaysia economy (having said so, I notice that their profit did not drop at all during 2008 and 2009).


Dividend yield is reaonably good at closed to 5% (and fairly consistent).


However, at closed to 10 times PER, the stock is more or less faily valued. 


At best a HOLD.