Typically, when a company’s revenue drops, its earnings drop as well — especially under the challenging circumstances facing companies and economies since the start of the pandemic early last year.
Yet, Megachem, a chemicals distributor, has proven otherwise. Given how the company has a relatively low profile, trading interest in it has been relatively muted. No trades have occurred in May, and it has a three-month average trading volume of just 890,000 shares. The company has a total of 133 million shares issued.
Francis Yau, the company’s CFO, thinks that the lack of interest in the stock is not something that can be attributed to the company. “For 18 years, we have done everything consistently. So I have come to the conclusion that the liquidity of the shares is not so much [anything to do] with the company, but it’s a market factor. I can see many companies in the stock market suffering from liquidity issues. It’s a syndrome,” says Yau in an interview with The Edge Singapore.
Investors might want to give a closer look at this company which seems to have maintained a steady footing throughout the pandemic upheaval. Year-to-date, it has gained 27% to close at 42 cents on June 1. At current levels, it is trading at around 11 times historical earnings, and giving a yield of 3.57% based on its total FY2020 payout of 1.5 cents — unchanged from FY2019.
Even when most companies struggled to get by last year, Megachem was able to post better results. For the most recent FY2020 ended December 2020, its revenue dropped 7.5% to $105.2 million, from FY2019’s $113.3 million. Yet, its earnings rose by 32% to hit $5.25 million in FY2020, compared to FY2019’s $3.98 million.
The FY2020 earnings included government grants of $1.2 million. Favourable gains from foreign exchange and fair value gain from listed equity security helped as well. Even when these grants were excluded, Megachem’s earnings still managed a slight improvement over FY2019.
Megachem got a lift from its associate company in Thailand as well. Megachem Thailand, which listed separately in Thailand in 2016, enjoyed brisk business last year from stronger sales of cleaning chemicals.
Its contribution to Megachem’s earnings for FY2020 increased by 43.6% to $1.6 million. Megachem Thailand has a market value of around THB1.45 billion ($61.28 million), which means the value of Megachem’s 36.19% stake is around $22.17 million, or 16.6 cents per share.
Diversified customer base
Founded in 1988, Megachem has grown to have a presence in 11 countries. Over the years, it has seen its fair share of economic cycles, including the 2003 downturn when SARS hit regional economies — and that was also the year Megachem was listed.
CFO Yau explains that the drop in revenue for FY2020 was not because business was bad. “The quantity of chemicals [we sold] did not drop. It was mostly due to the drop in the prices [per unit] of the chemicals”, which is closely linked to the price of crude oil.
Due to lockdown measures across various economies last year, demand for crude oil fell. Coupled with speculative trading, US West Texas Intermediate, a benchmark for this commodity, fell to as low as US$11.26 ($14.93) per barrel on April 21, 2020, from around US$61 at the start of the year, before ending the year at US$48.52.
Last year, even during the peak of the “circuit breaker” measures, Megachem’s activities could continue, albeit with certain restrictions. This is because Megachem is deemed part of the essential industry. However, some of its customers were not similarly classified; as such, orders from them stopped and this led to its custom-blending volumes falling. Unsurprisingly, the impact of the pandemic was more pronounced in 2Q and 3Q last year.
So, despite all these factors, how did Megachem manage to report better earnings? In the same interview, group managing director Sidney Chew attributes its performance to its diversified business model covering both suppliers and customers.
Over the years, Megachem has built up a broad customer base with companies from various different markets and industries. This means even if some specific markets were affected, Megachem is able to make up for the drop in demand by selling more to other customers in less affected markets. Last year, when sales to industries such as construction, coatings and metal finish sectors were affected, sales to growth markets such as electronics and healthcare increased instead.
Megachem also benefited from the Covid- 19 induced supply squeeze, unlike other companies. Chew reveals that while a few of Megachem’s bigger customers did have contracts with their suppliers, when the pandemic shut borders and disrupted international trade, Megachem could step in to fill the gap for the orders that were delayed or unfulfilled. Some companies approached Megachem as “we are able to provide them with a very comprehensive range of products and value-added services”, he says.
Furthermore, Chew observes that as companies started to lay off people due to the weakening business environment amid the pandemic, Megachem was asked to take on additional responsibilities, by acting as these customers’ procurement arm, for example.
While others cut headcount, Megachem has increased its staffing. “We need deep penetration in each country, industry and of course its customer base,” explains Chew. “We need to achieve that. So that’s why last year we took the opportunity to start building up our team. To further enhance our capability, to cover more ground and so on.”
Besides distribution, Megachem has a contract manufacturing business too, although that accounts for a small fraction of its overall turnover. What Megachem does is to help these customers with the mixing and blending of required chemicals. These companies can thus tap Megachem’s facilities to serve their customers in this region and there is no need for them to invest the capital expenditure to build their own manufacturing.
“You need to find a solutions partner you can trust, who has the infrastructure and competency to cater to their needs. They [the partner] must have the money to obtain the stocks, and hold the order that you can call on anytime,” says Chew.
Graphite venture
Despite having a base firmly in the oil industry, Megachem is not only unfazed about the rising trend of green energy and electric vehicles, but is in fact looking forward to it.
On March 9, the company announced its expansion into the manufacturing of so-called expandable graphite, which has flame retardant properties and is therefore widely used to create insulative coatings.
The company’s associate, Megachem Thailand, entered into a joint venture with Fuji Graphite Works from Japan, to establish Mega Fuji Graphite. Megachem Thailand will own 49% of the new company, with Fuji Graphite Works owning the remainder 51%. With Megachem’s stake of 36.19% in Megachem Thailand, it holds an effective stake of 17.7% in the joint venture.
Under the joint venture, Fuji Graphite will take about 80% of the graphite from the plant, while Megachem will sell the remainder throughout Asia. According to Chew, this joint venture, which has an initial registered capital of THB5 million, was created in response to the rise in automotive demand in Asia as the region sees growth not only in internal combustion engine (ICE) vehicles but also in electric vehicles (EVs). The expandable graphite can be used for EV batteries, allowing the company to profit from both the continued manufacture of ICE vehicles, as well as the transition to EVs that is expected to take place.
Statistics from the Asean Briefing magazine in 2019 say ASEAN’s automobile industry is set to see “continued growth”, particularly from its largest markets in Thailand and Indonesia.
While the Covid-19 pandemic has definitely put a dent in this growth, Nikkei reported that some countries saw a recovery in the fourth quarter of 2020 as the pandemic came under better control.
Nikkei reported in February that sales of new automobiles in six major Southeast Asian markets declined for a second straight year in 2020 as the pandemic weighed on the industry. Total sales in Thailand, Indonesia, Malaysia, Vietnam, the Philippines and Singapore fell 29% to 2.44 million vehicles. In April alone, the tally plummeted roughly 80% as the authorities imposed restrictions to curb the spread of the virus. But market conditions began to improve later in the year, and December sales dipped just 0.2% y-o-y to about 312,000.
Going forward, the company will continue to focus its efforts on Asia, as Chew believes there is a lot of space for the company to expand in the region, given its growing population and growing middle class. Furthermore, Chew hopes that Megachem can be a partner for the US and European firms wanting to set up shop here. He says: “Those manufacturers from the US and Europe will definitely have to set up facilities in Asia [to serve the Asian market].”
Chew describes those who have invested in Megachem as “long-term investors”. He adds: “They know that this is a well-managed company, and they are all aware of our competencies. Their money is in good hands.”
Photo: Megachem
