SINGAPORE (June 26): SAC Advisors is starting coverage on Megachem at “buy” with a target price of 50 cents, which translates into 14.9 times FY19P/E to imply a 26% discount to the sector average.

In an initiation report on Tuesday, analyst Eing Kar Mei highlights the speciality chemicals provider as a proxy to the stronger global economy with an attractive dividend yield of 4.8-5.7%.

Eing likes the specialty chemicals provider for its strong corporate governance, prudent management and its presence in a resilient industry, and is expecting the group to deliver top and bottomline growth in the next three years.

This is to be driven by global economic growth on rising demand for construction, electronics and water treatment; strong demand from Asia as well as for contract manufacturing services; and a focus in the higher-margined biotech segment, she adds.

At its last closing price of 32 cents on Monday, the counter is trading at 9.6 times FY19 P/E, which is more than a 50% discount to the sector average of 20 times – a valuation spread which the analyst believes is “too wide”, even though some gap is warranted considering Megachem’s smaller operational size when compared to its peers.

“Unlike commodity chemicals, demand for specialty chemicals is relatively insensitive to price changes,” notes Eing.

She particularly sees a key advantage in Megachem’s wide global distribution network which offers a one-stop solution and just-in-time delivery, thanks to its IT and supply chain management system amid firm underlying demand for speciality chemicals.

“This, coupled with Megachem’s diversified customer base and industry reach, contributed to a strong track record of stable revenue and gross margins. The relatively high entry barriers – patent security concern, technical know-how, distribution network and stringent product qualification – help to rein in competition in the industry,” says the analyst.   

As at 2:28pm, shares in Megachem are trading flat at 32 cents or 10.4 times FY18F earnings.