This article first appeared in The Edge Financial Daily on November 20, 2019 - November 26, 2019
Hextar Global Bhd
(Nov 19, 70 sen)
Maintain outperform with an unchanged target price (TP) of 95 sen: Hextar Global Bhd returned to the black with its third quarter of financial year 2019 (3QFY19) net profit of RM8.7 million following the previous quarter’s impairment-marred loss. Its cumulative nine months net loss of RM5.3 million is on track to meeting our forecast marginal net profit of RM2.6 million for FY19. We reiterate that FY19 is a “clean-up year” of sorts given the consolidation of Halex Holdings Bhd and Hextar businesses, hence the less-than-encouraging financials are not particularly alarming.
We still look forward to FY20, with the scope for growth still ample despite it already dominating approximately 30% of the domestic market. We affirmed our “outperform” call with an unchanged price-earnings ratio-derived TP of 95 sen — 16 times forecast FY20 earnings per share. Hextar made an unexpected dividend announcement of 3.58 sen per share.
Its 3QFY19 revenue was up 74% quarter-on-quarter (q-o-q) to RM97.2 million mainly due to a higher contribution from the agriculture segment as operating conditions improved on stronger prices of commodities. Its gross profit was up a robust 96% q-o-q to RM20.4 million on account of better margins. A recent distribution agreement entered into with Sumitomo Chemical Vietnam Co Ltd for distributing its products in Vietnam augurs well, paving the way for Hextar to have a stronger presence in Indochina.
Mergers and acquisitions (M&A) have been identified as a growth strategy in expanding on the group’s approximately 30% market share, though the management is not rushing to close any deals given the prevailing soft market conditions. We gather that things are currently being worked on.
With the industry likely too fragmented to mount a serious challenge to its dominant market position, Hextar however has bargaining power and ample time.
Its dividend declaration of 3.58 sen per share was a surprise, as just a reward for the bulk of minority shareholders currently out-of-money after a share placement exercise. We gather the group has sufficient cash, following recent repayments on its receivables, for this dividend payment and/or M&A opportunities if they arise.
An uptick in commodity prices has also corresponded to greater applications of agrochemicals, pointing to an operationally stronger second half of 2019 onwards — though it was already partly reflected in 3QFY19 numbers. — PublicInvest Research, Nov 19