MegaChem - SAC Capital 2022-03-11: Growth Momentum To Sustain, But At Lower Margins

MEGACHEM LIMITED (SGX:5DS)

MegaChem - Growth Momentum To Sustain, But At Lower Margins

Higher chemical prices and sales volumes driven by demand recovery and improving business environment propelled MegaChem (SGX:5DS) to a record year. For FY21, MegaChem achieved a 32.0% topline growth to S$140.3m and a 52.0% bottom line growth to S$8.0m, beating our FY21E forecasts by 5.4% and 25.0% respectively.
The sharp rise in MegaChem's net profit was due to better operating margin which improved from 4.8% to 6.0%. In addition, effective interest rate dropped to 13%, which is lower than our forecasted 20% (~S$0.5m difference).

MegaChem's growth momentum is expected to sustain into 2H22 driven by:
1. backlog as customers are restocking their inventories that were depleted during the pandemic; and
2. the surge in demand for chemicals as economic activities pick up across the world.
The pandemic has resulted in a shift in business model as customers are opting for smaller and more frequent purchases from distributors. MegaChem’s established global logistic network has allowed them to fulfil this role.
To the customers, MegaChem is helping to hedge their inventory risks by ensuring the continuous provision and management of chemical supplies. While firmer oil and commodities prices are pushing up the prices of specialty chemicals, MegaChem is able to mitigate some of the effect by passing on these costs to the customers.

MegaChem supplies a wide range of specialty chemicals used in many industries, and this insulates it from the vagaries of any single sector. In FY20, MegaChem benefited from a surge in demand for specialty chemicals driven by cleaning and disinfection, technology and healthcare sectors and in last year, MegaChem saw growth coming from the flavours, fragrance, construction and electronics sectors.
Through its diversified sector and geographical coverage, MegaChem has demonstrated that it is able to make quick adjustment to meet changing demand and supply to industries that are experiencing growth.
The new Malaysia warehouse, which is near completion, will further expand MegaChem’s capability. We believe the new warehouse can ride on the semiconductor sector growth in Malaysia.

We raised our FY22E topline estimates for MegaChem by 4.4% as we expect sales to remain at the elevated level driven by demand.
Global economic growth is estimated to be at ~4.4% and growth in emerging and developing Asia is at ~5.9% for 2022. However, we expect the exceptional operating margins to moderate to ~5.7% in FY22E and normalise further to ~5.1% In FY23E.
Overall, our FY22E bottom line estimates for MegaChem still increased by 23.0%.
Our DCF-derived (COE:9.3%) target price of S$0.58 for MegaChem translates into FY22E P/E of 10.3x and P/B of 1.2x.
See

Lam Wang Kwan SAC Capital Research | https://www.saccapital.com.sg/ 2022-03-11

SGX Stock Analyst Report BUY MAINTAIN BUY 0.58 UP 0.550