Megachem - SAC Capital 2022-08-16: 1H22 Earnings Beat Our Expectations


Megachem - 1H22 Earnings Beat Our Expectations

  • MegaChem (SGX:5DS) delivered 1H22 revenue and net profit growth of 14.1% and 13.0%, respectively, riding on buoyant crude oil and downstream chemical prices, tighter supply from Europe caused by energy constraints, and uptick in demand from ASEAN re-opening.
  • Revenue from ASEAN (60.8% of total revenue) rose 16.8% and Europe 13.3%. Robust mining and mineral sectors also drove revenue higher in the Middle East (+48.7%) and Australia (+57.3%). North Asia, however, fell 28.9%, hurt by China’s strict COVID lockdowns that affected manufacturing activities.
  • Higher corresponding working capital required have resulted in operating cash outflow of S$5.7m. We think this should normalize to positive operating cash flow (OCF) for FY22.
  • MegaChem is involved in high mix/low volume specialty chemical products used in a diverse range of industries, in which the customers prioritize product availability and delivery lead time over prices. About 23% of revenue is contributed by the surface technology applicable to the tech, medical and auto sector. Supply chain bottleneck and step up in near-shoring of manufacturing activities have also contributed to the increase in orders.

MegaChem - Earnings forecast and valuation

  • We see continued earnings momentum for MegaChem in 2H2022 and FY2023, driven by
    1. strong foreign investments in Singapore (1Q22: S$36.9bn) and Indonesia (2Q22: US$10.9bn, +39.7% y-o-y); and
    2. recovery in China in 4Q with the lifting of movement restrictions to propel manufacturing activities in these regions.
  • With the completion of the Malaysia warehouse, MegaChem saves on rental costs for third party space, and is able to achieve greater efficiency and operating leverage under one roof. It also plans to acquire a warehouse in Indonesia that is located near its customers, highlighting its confidence in the Indonesian market.
  • A potential risk is a recession in the developed markets that impact demand for products out of Asia.
  • We have raised our FY22E net profit estimates for MegaChem by 9.5% to S$8.8m, and FY23E by 13.6% to S$8.9m, and maintain our DCF-derived target price for MegaChem at S$0.58 (COE: 10%).
  • See

Peggy Mak SAC Capital Research | Yeo Peng Joon SAC Capital | https://www.saccapital.com.sg/ 2022-08-16
SGX Stock Analyst Report BUY MAINTAIN BUY 0.580 SAME 0.580