MegaChem - SAC Capital 2022-06-20: FY22 Could Be Another Record Year


MegaChem - FY22 Could Be Another Record Year

  • FY22E is turning out to be another record year for MegaChem (SGX:5DS), after 51.4% gain in net profit in FY21.
  • We are raising our FY22E net earnings estimates for MegaChem by 6.7%, to reflect higher ASP for specialty chemicals and improved margins. We expect MegaChem's FY22E net profit to grow by 2.6% y-o-y, or 11.7% if non-recurring government grants received in FY21 were excluded.
  • The higher ASP for specialty chemicals is driven by higher upstream crude oil and petrochemical prices. From Jan-Apr 2022, price of crude had risen 58%, and petrochemical prices were up 14%, according to ICIS Petrochemical Index. Singapore’s chemical export prices rose 6% in the first four months of 2022.
  • Major chemical distributors have reported strong 1Q22 improvement in revenue and operating income. Revenue of PT Lautan Luas, a commodity chemical distributor, surged +40.9% y-o-y and +10.2% q-o-q, with operating income +89.7% y-o-y and +2.7% q-o-q. Brenntag reported sales gain of +44.7% y-o-y and +12.1% q-o-q, with bigger gain in operating EBITDA by +54.2% y-o-y and +33.7% q-o-q.

What has changed?

  • Supply chain disruption and demand uncertainty have caused MegaChem’s customers to rethink their strategy for raw material procurement. Instead of bulk purchases and hold stock, they are looking to suppliers with a diversified geographical network that can deliver goods on short notice and in smaller quantity. MegaChem’s global network of warehouses and logistic supply bases in 11 countries is a competitive edge.
  • EU nations have agreed on cuts in oil imports from Russia, which will reduce to 10-11% of its current level. The EU has also committed to reduce gas imports by two-thirds within a year. Ireland, Germany and Switzerland are amongst the top five chemical producing countries in the world.
  • Disruption in oil and gas supply could negatively impact chemical exports out of EU, till the EU chemical producers find substitutes for the Russian imports. Customers could turn to specialty chemicals supply from Asia. About 55% of MegaChem’s sales are to the ASEAN markets, 13% to Europe, and 12% to North Asia.

Maintain BUY rating on MegaChem

Lam Wang Kwan SAC Capital Research | https://www.saccapital.com.sg/ 2022-06-20
SGX Stock Analyst Report BUY MAINTAIN BUY 0.580 SAME 0.580