MegaChem Ltd - NRA Capital Research 2017-03-06: FY17 Growth Drivers Are Already In Place

MegaChem Ltd - NRA Capital Research 2017-03-06: Fy17 Growth Drivers Are Already In Place MEGACHEM LIMITED SGX: 5DS

MegaChem Ltd - FY17 Growth Drivers Are Already In Place

Profitability was better than expected due to higher gross margin

  • MegaChem reported net profit attributable to shareholders of S$1.25m on revenue of S$48.5m for 2H16 against our forecast of S$1.01m and S$50.41m respectively.
  • Revenue fell by S$4.52m or 8.5% year-on-year in 2H16 solely due to lower distribution activity. Contract manufacturing revenue rose marginally by S$0.04m to S$1.83m. As revenue was only 3.8% below our forecast, it can be said to be within expectation.
  • More importantly, net profit attributable to shareholders exceeded our forecast by 24% because of margin improvements. Gross margin rose from 25.0% in 1H16 to 25.7% in 2H16, which added approximately S$0.3m to gross profit.

Lower impairment and write-offs to drive 2017 profitability higher

  • Due to currency controls, the collectability of receivables from customers in Venezuela became uncertain and MegaChem impaired about S$0.9m of its trade receivables.
  • Secondly, the company wrote off S$0.6m of inventory in 2016, about S$0.31m higher than in 2015. We reckon that these costs are unlikely to recur at such high levels in 2017.
  • In addition, we can expect about S$0.25m of cost savings in 2017 from the full depreciation of certain PPE. As such, we forecast PATMI growth of 57% from S$2.0m in 2016 to S$3.2m in 2017 despite modest forecast revenue growth of 5% to S$104.8m.

Expect top-line growth to resume in 2017

  • Among top chemical distributors, we observed mixed growth. For instance, Brenntag Group and Univar reported lower to flat revenue of -0.1% for 9M16 and -10.1% for full year 2016 respectively. On the other hand, IMCD reported higher revenue growth of 14.6% in 9M16.
  • For MegaChem, sales fell the most in the ASEAN region, by S$8.75m or 11.7%. Conversely, MegaChem saw positive sales growth of S$0.1m to S$1.5m in South Asia, Middle East and Australia.
  • Among the diverse applications, we can also expect higher demand for architectural coatings in 2017 on the back of higher infrastructure spending. Other growth areas include the pharmaceutical, food and beverage industries.
  • Given these opportunities, we decided to project modest revenue growth of 5% in 2017.

IPO of Thai associate – funds to drive IndoChina market expansion

  • MegaChem’s associated company MegaChem (Thailand) Public Company Limited commenced trading on the Stock Exchange of Thailand Market for Alternative Investment on 23 February. MegaChem’s stake of 36.2% is worth about S$7.2m.
  • More importantly, the IPO has raised THB 178.2m or S$7.2m to be used as capital to open branch offices in Thailand, Myanmar and Cambodia, and as working capital for MegaChem (Thailand).
  • In general, we have a positive outlook on MegaChem’s growth going forward, but refrain from providing a rating given the current valuation.

Liu Jinshu NRA Capital Research | http://www.nracapital.com/ 2017-03-06
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