MegaChem Ltd - NRA Capital Research 2017-09-03: Outlook For Growth Remains Intact

MegaChem Ltd - NRA Capital Research 2017-09-03: Outlook For Growth Remains Intact MEGACHEM LIMITED SGX: 5DS

MegaChem Ltd - Outlook For Growth Remains Intact

1H17 one-off gain does not diminish full year outlook

  • In 1H17, MegaChem reported PATMI of S$2.26m due to S$1.84m of one-off gain on dilution of interests following the listing of its Thai associated company Megachem (Thailand) PCL. The results also included S$1.25m of impairment of trade receivables and S$0.52m of write-off of inventory, of which S$0.6m was non-recurring in nature as the company has since reduced its exposure to Venezuela.
  • Adding back these non-recurring items, we derived a core profit of S$1.02m (S$2.26 – S$1.84 + S$0.6) for 1H17. This level of profitability, if repeated in 2H17, will imply a full year reported net profit of S$3.28m, in line with our forecast of S$3.2m for FY17F.

Reporting uptick in business confidence

  • The company has further reported an uptick in business confidence in 1H17 following a dip in 2H16; which explains for the improved growth from 2H16, even though revenue was flat compared to 1H16. Pillars of growth include growing demand for additives from the pharmaceutical, food and beverage and other consumer product industries.
  • Demand for coatings from the infrastructure and construction industries was also positive. Demand from the marine and shipping industries remained weak. Such weakness could be seen in lower revenue from the North Asia region whose revenue fell by S$1.7m year-on- year.
  • On the other hand, revenue from ASEAN, Middle East and Australia grew by S$2.4m year-on-year.
  • Overall, we are seeing the fruits of efforts to expand into new industries and new geographical markets while keeping tight control over costs and maintaining margins.

Lower gross margin is a potential risk

  • We noted that gross margin fell by 0.8% point from a year ago to 24.2% in 1H17. The decline in gross margin was due to higher inventory write off and lower sales contribution from the manufacturing segment.
  • Our model is based on a gross margin assumption of 25% across the forecast horizon of FY17F to FY21F. A 1% point reduction in gross margin is equivalent to some S$1.0m less profit to the bottom-line each year which reduces our valuation from S$0.485 to S$0.392 per share.

Trading at a discount to listed Thai associate.

  • MegaChem’s 36.19% stake in Megachem (Thailand) PCL is worth about S$20.95m. Conversely, the group trades at S$52.0m.
  • MegaChem reported an EBITDA of S$3.2m for 1H17, implying a EV/EBITDA (1H17 annualised) multiple of 6.4x. Megachem (Thailand) made EBITDA of THB30.75m in 1H17 and trades at 21.5x EV/EBITDA. From this perspective, MegaChem is undervalued. However, the difference in valuation will quickly narrow if Megachem (Thailand) trades at lower EV/EBITDA multiples.
  • MegaChem’s EV/EBITDA multiple rises to 8.2x if Megachem (Thailand) trades at just 8.5x EV/EBITDA. In this update, we keep our forecasts and valuation unchanged.

Liu Jinshu NRA Capital Research | http://www.nracapital.com/ 2017-09-03
SGX Stock Analyst Report NOT RATED Maintain NOT RATED 0.485 Same 0.485