SAC Capital analyst Lam Wang Kwan is remaining buoyant on Megachem with a “buy” call after the chemicals company saw a record year.
For the FY2021 ended December, Megachem saw its topline grow 32.0% y-o-y to $140.3 million, while its bottom line surged 52.0% y-o-y to $8.0 million, surpassing Lam’s full-year forecasts by 5.4% and 25.0% respectively.
Going into FY2022, Lam has raised his topline estimates for the year by 4.4% as he expects sales to remain elevated, driven by demand.
He expects the chemicals company’s growth momentum to sustain into 2HFY2022 driven by backlog as customers are restocking their inventories that were depleted during the pandemic. The surge in demand for chemicals as economic activities pick up across the world are another growth factor, writes Lam in his March 11 report.
As such, the analyst has upped his target price estimate to 58 cents from 55 cents previously, as he expects Megachem’s growth momentum to sustain albeit at lower margins.
“Global economic growth is estimated to be at [around] 4.4% and growth in emerging and developing Asia is at [around] 5.9% for 2022. However, we expect the exceptional operating margins to moderate to [an estimated] 5.7% in FY2022 and normalise further to 5.1% in FY2023,” writes the analyst in his March 11 report.
See also: Test debug host entity
“Overall, our FY2022 bottom line estimates still increased by 23.0%,” he adds. Lam’s higher target price translates into an FY2022 P/E of 10.3x and P/B of 1.2x.
An adaptable business
In addition to the continuous tailwinds, Lam sees Megachem as being adaptable to changing demand.
See also: Maybank downgrades ComfortDelGro in contrarian call over Addison Lee acquisition worries
“Megachem supplies a wide range of specialty chemicals used in many industries, and this insulates it from the vagaries of any single sector,” writes the analyst.
To be sure, the chemicals company benefitted from a surge in demand for specialty chemicals driven by cleaning and disinfection, technology and healthcare sectors in the FY2020. In FY2021, Megachem saw growth coming from the flavours, fragrance, construction and electronics sectors, notes Lam.
“Through its diversified sector and geographical coverage, Megachem has demonstrated that it is able to make quick adjustment to meet changing demand and supply to industries that are experiencing growth. The new Malaysia warehouse, which is near completion, will further expand Megachem’s capability. We believe the new warehouse can ride on the semiconductor sector growth in Malaysia,” he adds.
Shares in Megachem closed flat at 48 cents on March 14.
Photo: Stock image
