Felicia Tan Wed, Jun 22 2022
SAC Capital analyst Lam Wang Kwan is keeping “buy” with an unchanged target price of 58 cents on Megachem as he sees the higher average selling prices (ASPs) for specialty chemicals to improve margins for the FY2022.
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,” the analyst writes in his June 20 report.
“Megachem’s global network of warehouses and logistic supply bases in 11 countries is a competitive edge,” he notes.
In addition, customers seeking a supply of specialty chemicals could turn to Asia following the disruption in oil and gas supply, which negatively impact chemical exports out of the European Union (EU).
About 55% of Megachem’s sales are to the Asean markets, while 13% of sales are made to Europe. Another 12% of sales is made to North Asian markets.
On this, Lam is raising his FY2022 net earnings estimates by 6.7% to reflect the higher ASPs for specialty chemicals. The higher earnings estimates have also factored in improved margins.
“The higher ASP for specialty chemicals is driven by higher upstream crude oil and petrochemical prices,” the analyst notes. “From January to April, 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.”
“Our revised FY2022 and FY2023 [estimates] are premised on a 3% rise in chemical prices in FY2022 and a 1% decline in FY202E, on weaker macro-economic environment in FY2023,” he adds.
To this end, Lam has also estimated Megachem’s FY2022 net profit to grow by 2.6% y-o-y or 11.7% excluding the non-recurring government grants received in the FY2021.
The analyst has also noted that major chemical distributors have reported strong improvement in their revenue and operating income for the 1QFY2022.
This includes commodity chemical distributor PT Lautan Luas, which saw revenue surge 40.9% y-o-y and 10.2% q-o-q. Brenntag, too, reported a sales gain of 44.7% y-o-y and 12.1% q-o-q, with a bigger gain in operating EBITDA by 54.2% y-o-y and 33.7% q-o-q.
Finally, Lam sees Megachem’s gross margin in the FY2022 widening by 0.6 percentage points to 25.2%, which is aided by inventory stockpiled at end 2021.
However, Megachem will face higher working capital needs due to higher input costs.
A strong USD versus regional currencies will also pose some forex risks as raw materials are purchased in USD, while sales to countries such as Indonesia, China and Vietnam are settled in the local currencies, says the analyst.
Shares in Megachem closed at 47 cents on June 22.