CFA Society Singapore
SINGAPORE (Apr 30): NRA Capital likes Megachem as a proxy to broad economic growth, and values the counter at $67.9 million or at about 14.7 times FY18F PATMI.
This comes after the specialty chemical solutions provider reported a strong set of results for 2H17, resulting in 88.1% higher FY17 earnings of $4.2 million.
In an unrated report on Monday, analyst Liu Jinshu raises his estimated revenue growth to 7% per year across 2018-2022, which in turn has lifted FY18F PATMI to $4.6 million from $3.9 million previously in spite of reduced gross margin assumptions to 24% in 2018 – 2019 and to 23% in 2020 – 2022.
This results in expectations of 26% PATMI growth over an adjusted PATMI of $3.6 million for 2017, excluding the one-off gain from listing Megachem’s Thai associate and about $1.2 million of non-recurring impairment of trade receivables from Venezuela.
In particular, Liu finds Megachem’s strong FY17 revenue momentum reassuring, and believes it suggests of a positive outlook for 2018.
He attributes the group’s high gross margin to its management’s strategy of focusing on selling high-margin specialty chemicals with less bulk, or commodity chemical sales.
The analyst also highlights the lifestyle industry as a potential area for future growth given its low base of only $2.2 million in 2017, following the recovery of the oil & gas (O&G) sector’s strong recovery from a low base with revenue growing 30% to $6.5 million from $5 million previously.
However, Liu has identified rising costs as a key concern, especially given higher oil prices of late.
While he believes Megachem could pass on some of these costs to its clients, the analyst thinks there is a chance the group’s gross margin could still be affected given how gross margin was as low as 20.2% and 22.9% in 2014 and 2015, respectively.
“Larger competitors are eyeing the Asia-Pacific market where Brenntag and Univar have made recent moves to expand their presences. Univar for instance sees opportunity in selling more specialty chemicals,” adds Liu.
As at 4.31pm, shares in Megachem are trading flat at 38.5 cents.