Analysis

Analysis of Samchem Holdings Bhd

Dear Readers

Introduction

Samchem Holdings Bhd (“Samchem“) is one of the biggest industrial chemical distributors of Polyurethane, intermediate chemicals and specialty chemicals in Malaysia. At the time of its IPO, in 2009, Samchem has a market share of about 33% in Malaysia.

Samchem is predominantly an industrial chemical distributor (about 98.5% of its total revenue in FY2016). However, it is also involved in the retail sales and distribution of projectors and Information and Communication Technologies system (“ICT“).

Samchem_3
He sees me rolling, he hating. Credit: Samchem
Industrial chemical distributor

It is important to note that Samchem is not a chemical manufacturer. It only distributes industrial chemicals which it sources from suppliers and chemical manufacturers locally and internationally. Samchem has a long standing relationship with chemical manufacturers such as Petronas, Shell, EP, ExxonMobil Chemicals, Momentive Performance Materials (Thailand), Tylose GmbH & Co. KG (Germany), Kuraray Specialities Asia Pte Ltd (Japan) and the list goes on.

It has distributing rights to 400-500 chemicals. Samchem’s products are used in an array of industries including petrochemical, automotive, electronics, paint, furniture and etc.

Further, Samchem has a blending operation, in Johore and Selangor (not too sure), to produce customised solvents tailored to client’s needs.

Audio Video & ICT

As strange as it is, Samchem is making full use of its established distribution networks (warehouse and other logistical infrastructure) to conduct a retail business of selling audio video equipment such as projectors and ICT systems. Sales in this segment contribute a minute portion of about 1.5% of total sales in FY2016.

Financials
DATA 2016 2015 2014 2013 2012
REVENUE (RM’000) 697178 600005 630592 543021 526448
PROFIT TO SH (RM’000) 15077 4034 5966 8740 8702
OPERATING PROFIT (RM’000) 33832 15715 20656 21451 20139
SHAREHOLDERS’ EQUITY (RM’000) 119510 111520 111641 108582 102785
DEBT (RM’000) 217900 155898 192897 187955 164182

RATIO

DEBT TO EQUITY RATIO 1.82 1.40 1.73 1.73 1.59
OPERATING PROFIT MARGIN 0.048 0.026 0.033 0.039 0.038
OCF RATIO 0.04 0.35 0.04 -0.10 0.13
PROFIT MARGIN 0.02 0.006 0.01 0.01 0.01
EPS (CENTS) 11.1 3.0 4.3 6.4 6.4
EPS (ADJUSTED) CENTS 5.49 1.5 2.3 3.2 3.2
DPS CENTS 6.5 3.5 2.5 2.5 2.5
DIVIDEND PAY OUT 0.58 1.16 0.58 0.40 0.40
P/E 12.89 29.13 14.81 10.03 9.69
ROE 12.62 3.61 5.34 8.05 8.47

Samchem’s revenue has been on the rise since 2012. There are 4 major markets that contribute to its revenue namely: Malaysia, Vietnam, Indonesia and Singapore.

Samchem was also sitting on a net cash of about RM46 million (Q1 FY2017). According to the same report, cash flow from operating activities was very poor (-RM28 million). This is because a bulk of its cash is tied up on inventories. Further, inventories are at a high of RM114 million which is an increase of RM26 million from Q4 FY2016.

Despite abysmal profit margins, profit margins improved dramatically from 0.6%, in FY2015, to 2%, during the last financial year. Cost cutting measures or administrative efficiency may have attributed to the better margin of profit as suggested by the operating margins (see table).

FY2016 was a tremendous year for Samchem. Regional markets such as Vietnam (31% of total revenue), Indonesia (13% of total revenue) and even Singapore (0.4% of total revenue) saw an increase in revenue and profit. Overall, profit grew by 152% on the back of a rise of 16% in revenue, from FY2015.

The rise in Samchem’s share price is in tandem with the rise of its earnings. Share price has risen about 133% since a year ago. Before that, its share price was stagnant.

My calculations indicate that Samchem’s growth rate, in the past 5 years, was about 11.3%. Sustainable growth rate is about 5.3%. My rough estimation of Samchem’s fair value is about RM0.80-RM0.85, taking into recent the bonus issue of 1:1 in May 2017.

Since the bonus issue, Samchem’s share price has dropped about 16% from RM1.07 to RM0.90 (as at 26.05.2017) on profit taking and also because of the boardroom showdown between, a number of substantial shareholders (forming 19% of shareholdings), some of whom are also office bearers, and the current executive director, Ng Soh Kian.

An EGM has been called, on 23.06.2017, to vote for the removal Ng Soh Kian.

Conclusion

I like Samchem for its:

  1. Improving cost efficiency.
  2. Improving profit margin.
  3. Increasing revenue.
  4. Wide-based clientele/not dependent on a single industry.

The cons are:

  1. With such a thin margin, it is exposed to any drastic increase in the costs of its chemical supplies.
  2. As most of its international trades are USD denominated, it is also vulnerable to fluctuations in currency exchange. The reason being it does not only distributes to the ASEAN markets but it also sources for supplies overseas. Notwithstanding that, Samchem has currency hedging in place.

If you were to buy Samchem’s shares at about RM0.90, be prepared to pay a premium. It may be the case that its share price may drop further due to the boardroom drama and recent market consolidation. However, the said boardroom drama will not be a matter of substance to the fundamentals of Samchem. This is because Samchem has sound financials, it is already a major player in the chemical distribution market and it is backed by established distribution and supply networks. Any drop in share price, owing to the boardroom showdown, should be construed as a buying opportunity. Be on the lookout.

Disclosure

I do not own shares of Samchem.

Reference:
  1. http://samchem.com.my/
  2. Samchem IPO prospectus
  3. FY2016 Audited Report
  4. Q1 FY2017 Report
  5. https://markets.ft.com/data/equities/tearsheet/summary?s=SAMCHEM:KLS
  6. http://www.thestar.com.my/business/business-news/2017/05/24/samchems-statement-points-to-boardroom-conflict/
  7. http://www.thestar.com.my/business/business-news/2017/05/24/samchem-shareholders-to-decide-on-eds-removal-on-june-23/
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