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Author: davidtslim   |   Latest post: Fri, 28 Aug 2020, 7:46 PM

 

Samchem – Beneficiary of Raw Chemical Material supply to support healthcare industry (Davidtslim)

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See the extract from Samchem Annual report 2019 as figure below  

Source: Annual Report 2019

Highlights:

  1. Samchem is a leading industrial chemical distributor in Malaysia and South East Asia with growing revenue of over 1 billion per year in 2018 and 2019.
  1. If we strip off the forex loss of 6.36m (mainly due to rupiah depreciation), last quarter profit actually was new high (PBT 13mil) in recent year even during MCO period which some of its operation might be slightly affected.
  1. Strong demand even during MCO may come from the raw chemical material supply chain to sanitiser, glove and healthcare related industries.
  1. I like Samchem mainly due to it has a a division that does Blending of solvents to make customised products for specific applications. This blending segment can increase their profit margin as a growing number of companies are outsourcing their blending processes and its Nusajaya’s facilities has the capacity to provide these needs.
  1. This Blending division also focuses on chemical distribution with value-added services such as storage & warehousing and bulk-breaking (into drums or smaller packaging)

Catalysts:

  1. Continuously higher demand for its Hand Sanitiser raw chemical material products due to Second wave of Covid-19 in South East Asia. According to recent Samchem AGM, Sanitiser chemical raw material sales has increased from 5% to 20% since Feb. 
  2. Their chemical supply to Glove Industry in 2020 and 2021 may increase also due to all glove players ramp up their production although their weightage to their overall revenue is not too significant
  3. Samchem still growing its oversea business especially in Vietnam which is growing steadily every year and they also got IPO plan to list its Vietnam business.
  4. Smaller players of Blending business are phasing out gradually due to higher competition and high capex requirement.  This may benefit Samchem as it may gradually improve its blending division in future due to lesser competition and higher economy of scale.
  5. Samchem continuous improving its operational efficiency especially on chemical distribution, packaging and warehousing management system which can further improve its profit margin. 

 

Revenue and Profit Margin:

Samchem’s revenue has shown increment from 2016 (around 602m) to 1.05B in 2019 as shown in the Figure 1. This is more than 50% increment over 4 years time. As long as the company can improve its profit margin by 1-2%, the net profit improvement year-on-year will be quite significant.

Figure 1: Samchem 6 years Financial data

Their profit margin can be further improved by improving its logistic, terminal and warehouse management system especially from Blending division which they doing some customised products for specific applications which command higher margin.

 

Company Background (By my friend, Mr Tan)

Samchem has been in operation for more than 30 years and is a leading industrial chemical distributor in Malaysia and South East Asia. Samchem supplies about 500 different petrochemicals and services to more than 7,000 clients from industries such as automotive, paints and inks, oil and gas, and agriculture — across the region.

The core business of the Group is in Distribution of Chemicals that are used in personal care & grooming (deodorant, mouthwash, shampoo, hair gel, toothpaste, cosmetics, nail polish), household care & cleaning (detergents, multi-purpose cleaners, stain removers, fragrances) and in industries such as the automotive, manufacturing, construction, paints and inks, agriculture, oil & gas, etc. The Group’s business has expanded as a result of sustained sales & marketing effort in the region for the growing portfolio of products from existing, as well as a growing list of principals.

Source: Samchem 2019 Annual Report

Samchem reported a 17% YoY decline in its Q1 2020 result although the revenue is actually flat YoY. However, if you read the section B5 of its quarterly report, you will find out that the decline is mainly due to the unrealised foreign exchange losses of 6.357M caused by the steep depreciation of IDR against the USD towards the end of the current quarter under review.

     

However IDR started to strengthen since April which means that Samchem could potential write back its unrealised foreign in Q2. If we remove the foreign exchange losses, the PBT would be 13M, highest since IPO. The normalised EPS is 3.57 after removing the unrealised foreign losses which is very good amid the challenges of the Covid-19 pandemic situation. I believe this is due to the demand from the raw material supply chain to healthcare industry as highlighted in its 2019 annual report as follows:-

“Since the onset of the COVID-19 outbreak, major ASEAN nations have seen their supply chains disrupted and all experienced economic slowdowns, especially with the imposed lockdowns. However, Samchem companies are in the supply chain (as chemical raw material distributor) to Essential Goods Manufacturers (such as hand sanitisers, disinfectants, personal and household care, gloves, some personal protective equipment, as well as the printing and packaging associated with all these products) and were able to meet the demand from these manufacturers in spite of the lockdowns. The Group’s diversified chemical distribution business allows the company to minimize the impact of downturns in the economy”

From the fundamental analysis point of view, at the current price of 83.5 cents, EY is 12.29 and ROIC is 14.13 which fulfil the magic formula criteria. Its ROE is 24.02% and normalise PE is only 7.46.

Due to its strong free cash flow registered in 2019, Samchem has increased its dividend pay-out from 3 cents in 2018 to 4 cents in 2019 or DY 4.79%. The only setback is the net profit margin which is still at low side of 3.96%.  However there is a news that the company is planning to establish an integrated hub for its regional chemical distribution which will help to increase its profit margin.

In summary, SAMCHEM biz will be benefited from the increase demand of raw material supply to the healthcare industry. In addition, the reopening of economy will see the company others industry’s product to pick up especially the packaging industry.

 

If you interested on my analysis report, please contact me at davidlimtsi3@gmail.com

You can get my latest update on share analysis at Telegram Channel ==> https://t.me/davidshare


Disclaimer:

This writing is based on my own assumptions and estimations. It is strictly for sharing purpose, not a buy or sell call of the company and the contents of this report should not be considered as professional financial investment advises or buy/sell recommendations. I strongly encourage you to do your own research and take independent financial advice from a professional before you proceed to invest.

I make no representations as to the accuracy, completeness, correctness, suitability, or validity of any information on my report and will not be liable for any errors, omissions, or delay in this information or any losses and damages arising from its display or usage. All users should read the posts and analysis the information at their own risk and we shall not be held liable for any losses and damages.

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Chart Stock Name Last Change Volume 
SAMCHEM 0.84 +0.015 (1.82%) 156,900 

  andrew_how25 likes this.
 
Valuegrowth45 I have been enjoying the dividend from Samchem every quarter for a year. Samchem is a deeply undervalued stock with undemanding PE even at current price. Top line growth is impressive and the business is well diversified. Vietnam IPO will be another X factor. Reliable management and major shareholders. RM2.00 should not be too difficult to achieve.
06/08/2020 6:10 PM
BursaInsight undervalued indeed
09/08/2020 9:50 PM
BursaInsight thanks for sharing
09/08/2020 9:51 PM


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