MegaChem Ltd - Tayrona Financial Research 2018-08-14: Growth Accelerated In 1H 2018

MEGACHEM LIMITED SGX:5DS

MegaChem Ltd - Growth Accelerated In 1H 2018

Megachem reported a strong set of results for 1H18 with revenue growing by 14.8% year-on-year from S$51.4m in 1H17 to S$59.0m in 1H18.
Gross profit margin continued to expand to 25.3% in 1H18 compared to 25.0% in 2H17 and 24.2% in 1H17. The improvement in gross margin was due to the absence of inventory write down in 1H18 and lower manufacturing overheads as the plant and machinery used in contract manufacturing was almost fully depreciated by the end of 1H17.

Excluding the impairment of receivables and fair value items, profit before tax grew by 108.3% from S$1.6m in 1H17 to S$3.3m in 1H18.

Following its listing, 36% owned associated company Megachem (Thailand) Public Company Limited has acquired 80% of a chemical distributor C.M.J Anchor Co., Ltd for THB124m (or about S$5m). CMJ imports and distributes ethanol to various customers in the spray, perfume and cosmetic industries in Thailand.
In July, Megachem Thailand has also incorporated a 51% owned joint venture Megachem (Myanmar) Limited.

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Currently, Megachem Myanmar trades in construction material, hospital equipment, seeds and fertilizers. We reckon that Megachem Myanmar will be a conduit for the group to sell its specialty chemicals in Myanmar, such as for the infrastructure and agriculture sectors.

The group also remarked that it is in the early stages of planning to expand in Malaysia, which may entail the construction of facilities on a plot of land that it has previously acquired. We expect construction costs to be less than S$5m and the group has adequate banking facilities and internal resources to fund this additional capex. That said, the group has yet to commit to this capex, depending on market conditions and the finalization of future plans.
Over the rest of 2018, the group will likely continue to expand its presence in the Indo-China markets.

Our key concern is if the tariffs between China and United States will affect MegaChem. That said, the group has a diversified supplier base and that it can modify its supply chain to adapt to e.g. higher costs for supplies from either US or China.

In this update, we keep our forecasts and valuation unchanged. The group met our forecasts for 1H18. We noted that the group raised its interim dividend from 0.5 cents to 0.7 cents per share. Hence, full year dividends will likely exceed our forecast of 1.2 cents.
That said, we continue to keep MegaChem unrated due to factors such as the low liquidity of its shares.

Liu Jinshu NRA Capital Research | Taynora Financial 2018-08-14

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