SAC Capital analyst Lam Wang Kwan has kept “buy” on Megachem Limited with a higher target price of 55 cents from 50 cents previously on the back of its record results for the 1HFY2021 ended June.
For the half-year period, Megachem’s earnings grew by 39.7% y-o-y to $3.8 million, while revenue increased 26.7% y-o-y to $65.9 million.
Both figures stood above Lam’s estimates for the FY2021.
His new target price translates into FY2021 price-to-earnings (P/E) of 11.4 times and price-to-book (P/B) of 1.3 times.
Lam has also upped his topline estimates for the FY2021 by 13.5% and bottom line estimates by 56.1% to factor in more customer wins and improved net margins from operating leverage.
In addition, he has increased his topline and bottomline estimates for FY2022 by 12.5% and 41.9% respectively.
In his report dated Aug 23, Lam has identified four tailwinds that the company is well-positioned to benefit from.
The factors, he adds, are sustainable into the 2HFY2021 as well.
First, an uncertainty in demand has resulted in customers opting for smaller and more frequent purchases from distributors like itself, instead of buying in larger quantities directly from chemical producers.
Second, the supply chain bottleneck also led to customers turning to sources that are nearer their manufacturing bases.
Third, Megachem also benefitted from the surge in demand for specialty chemicals used in cleaning and distribution, technology and healthcare sectors.
Finally, the firmer oil and commodities prices that lead to the increase in prices of specialty chemicals are also passed on to the customers.
These trends, he says, are likely to remain even after the Covid-19 pandemic.
Megachem is also well-positioned to ride on the capacity build-up of Malaysian glove manufacturers. It is also deemed to benefit from the capacity expansion of the semiconductor sector in Penang.
To this end, the company is building a new warehouse in Malaysia to position for the expected uptick in demand.
Shares in Megachem closed flat at 39 cents with an FY2021 dividend yield of 4.2%, according to SAC’s estimates.
Photo: Stock image
