SAC Capital is reiterating its “buy” call on Megachem Limited with a target price of 58 cents, following its recent 1HFY2022 ended June results release.
The chemicals distributor reported earnings of $4.5 million for 1HFY2022, up 18% y-o-y. Revenue, meanwhile, was up 14.1% to $75.2 million. It also declared an interim dividend of 0.8 cent per share.
The earnings and revenue growth were thanks to 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.
The higher corresponding working capital required has resulted in an operating cash outflow of $5.7 million.
In an Aug 16 report, analysts Peggy Mak and Yeo Peng Joon write: “We think this should normalise to positive operating cash flow for FY2022.”
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The analysts note that Megachem is involved in high mix/low volume specialty chemical products used in a diverse range of industries, in which the customers prioritise 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, writes the analysts, who expect to see continued earnings momentum in 2HFY2022 and FY2023, driven by strong foreign investments in Singapore and Indonesia, as well as recovery in China in 4Q2022 with the lifting of movement restrictions to propel manufacturing activities in these regions.
Meanwhile, Megachem has a new warehouse in Malaysia that it has just completed. With this, the analysts are upbeat on the fact that the group will be able to save on rental costs for third party space and is able to achieve greater efficiency and operating leverage under one roof.
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The group 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 impacts on demand for products out of Asia.
“We have raised our FY2022 net profit estimates by 9.5% to $8.8 million, and FY2023 by 13.6% to $8.9 million,” writes the analysts.
As at 10.25am, shares in Megachem are trading at 50 cents.
Photo: Megachem
