Megachem Limited (5DS) Earnings Call Transcript & Summary

The last year was a tough year. Externally, there are, of course, challenges. Just when we thought we were done with the COVID, Russia attacked Ukraine, and there was a Middle East conflict. And at the economy level, high inflation, high interest rates put pressure on businesses as business costs rise. Therefore, the business sentiment weakened, right? At the industry level -- so at the industry level, if you can recall, I mentioned about the inventory restocking sometime in 2022. Following the post-COVID reopening, there was some coined revenge spending and so on. So there was an exorbitant rebuilt of inventory. But then came a slowdown in the economy, and companies started to switch from restocking to destocking. In fact, almost throughout the 2023 because supply did exceed demand, right? Therefore, prices -- chemical prices fell. As for us, we -- in anticipation of the lower demand, we also cut our inventory in line with the industry trend. So we are pretty cautious in our inventory planning. Then came the fire on the 5th of July. That's the real impact on our results this year. We have made some announcements earlier on in the SGX. But to reiterate, the fire happened on 5th July at 132 Pioneer Road. We have 2 premises, back to back, 132 Pioneer Road, the other 11 Tuas Link. 11 Tuas Link were affected. 132, the warehouse caught fire, almost everything gone, including the equipment within the premises. However, most of our stocks are kept. In fact, 60%, 70% of our stocks are kept in third-party warehouses. So that enabled us to continue a major part of our operations. So if you later on see our results, in fact, our second half results will be better than first half, right? So all in all, last year was quite challenging, which therefore derailed our growth. Now let's go straight into the numbers, first with some highlights of the first half results. The second column shows the second half results. In the announcement, you will see year-on-year comparison. In this slide, I prefer to show the first -- second half against the first half purely because of the fire, so you can see the impact. So the second half sales came in at $62.3 million, increase of $1.6 million, 2.7%. And then the gross profit fell by $4.2 million, 31.7%. Essentially, the fire had impact at 2 levels of our P&L.: one, the gross profit because of the write-down of inventory; the other is the expense level, which I'll go into details later on. So if we adjust the gross profit for the impact of the fire, right, actually, the fall in the profit -- sorry, the gross profit was actually $15.1 million, an increase of $1.7 million, 12.9%. And the margins came in, in the second half, right, 24.2%, which is about our historical average. Expenses increased $6.4 million, 49%. If you adjust for the fire, it's an increase of $1.4 million, 10.9%. The bottom line, therefore, it's a loss of -- in the second half, it's a loss of $6.7 million as compared to a gain of $0.9 million in the first half. Adjusting for the fire, net profit after tax, $1 million, a marginal increase compared to the first half of 8.9%. Now let's see the full year results. For the full year, the sales came in at $123 million, down $20.7 million, 14.4%. Gross profit, down $11.9 million, 34.6%. But if you adjust for the fire, it's down $5.9 million, 17.3%. The margins -- gross profit margin is 18.3%. Adjusting for the fire, it's 23.1%. And that's marginally lower than our average of about 24%. Expenses higher, $4 million, 14.1%. Adjusting for the fire, actually lower by about 3.5%. Other income, $3.7 million. This includes insurance compensation claims -- payments rather of about $3 million roughly. The net effect is a loss -- net profit after tax loss -- net loss after tax of $5.8 million without a fire gain of $1.9 million. The loss translate into earnings per share of -- negative earnings per share of $0.0443 per share. I wanted to show you the trend over the last 5 years. If you notice in the first -- second half of '21, post the reopening of the -- COVID reopening, and the first half of 2022 was an exceptional period for us as sales and prices surged post the COVID lockdown. But the growth couldn't be sustained due mainly to external factors, slower demand, weaker business sentiment, as I mentioned earlier. Therefore, demand falls and prices also fell. In fact, the -- okay. Let's see the next chart. In fact, the fall in the sales reflects mostly the price fall. About 10% of it is about -- it's about the price fall. The rest are falling quantity of products sold. If you look at this chart, right? I think the message here is after each crisis, if you look at 2009 when there was a U.S. crisis, we rebounded very quickly. Then the COVID came. 2020, you saw a dip, not very much, a fall in the sales. And then we rebounded very quickly again. But the growth was, of course, disrupted in 2023 by the more challenging external environment. As you know, we are basically a distribution company, but we also do value-added services in custom blend services, which is essentially fee-based. And last year, we saw a fall in activities in both -- fall in sales in both activities. In terms of our sales breakdown by geographic segments, you will see a broad-based fall in the sales across all our geographic market segments. This reflects the overall weakness in the market conditions. In fact, across the chemical industry, most players didn't do very well. This chart shows the spread of our business in terms of the geographic segments that we are serving. Essentially, ASEAN constitutes 59%. That consists of countries like Singapore, Malaysia, Thailand, Vietnam, Philippines. Then we have Europe, 13%. That's serviced out of -- that's out of our U.K. office that serve the Euro market. And then we have Middle East from our Dubai office. And then Australia, 8%. North Asia, of course, 8%, consisting mainly of China and some sales to Korea and Japan. We have spoken consistently about our business strategy being diversified, and this chart shows you the spread of our business in terms of the industry to which our products go to, right? The largest segment is what we call performance coating and polymers. That's 33%. These are essentially industries like paint in construction. Then we have advanced polymer composites, the plastics, rubber and so on. Surface technology, 23%. These are largely metal finishing -- what we call metal finishing, electronics. And then biotech, the F&B, pharma and so on. And of course, resources, oil and gas. So fairly widespread of our business and covering a wide spectrum of industries. So therefore, it provides some kind of resilience to our business. For instance, during the COVID lockdown, some industries were -- companies in the industry were asked to close. But the essential industries were able to operate and -- because they are our customers, it provides some resilience to our business. So we are not very much affected during the COVID. Gross profit, as I mentioned earlier on, our historical average 24%, 25%. But it fell to 18.3% in 2023 because mainly of the inventory write-down of $5.9 million because of the fire. Without that, the margin will be about 23.1%. The second-level impact because of the -- from the fire is the expenses. Expenses increased by $4 million. The impact from the fire on the expenses is about $4.9 million, consisting of -- maybe after the fire, we need to demolish some of the structures of the building. And then we need to dispose the waste. And then we need to decontaminate because of some chemical spillage and so on. So that costs quite a bit of money. Of course, we also write down some of our assets that were destroyed during the fire. So $4.9 million impact on the expenses from the fire. Without that, the expenses were actually lower by about $1 million, 3.5%. Now the facility was covered by insurance. So, so far, we have received about $3 million of insurance payout in the year -- in the financial year 2023. So that goes into the other income and explains why the income increased by about $5 million. Other income increased by about $5 million -- $3 million rather. You can recall we have an associate in Thailand, which is also listed in the stock exchange. They announced their results last week. Their results came in marginally better, kind of flat. Some segments were better. Some were not so good. So the results net, a bit flat. This chart shows the breakdown of net profit, half yearly net profit. So once again, second half net loss, $6.7 million. Without the fire, it's actually a gain of $1 million. The full year net profit -- net loss rather, $5.8 million; without a fire, $1.9 million gain. Moving on to the balance sheet. I think the obvious question at that time was how is it going to impact our financial condition -- how the fire is going to affect our financial conditions. Fortunately, so far, we have managed it quite well. If you look at the cash position, right, before the fire, 30th June balance sheet was $12.4 million; 31st December, $13.6 million. And 2 reasons: one, we were cutting back our inventory prior to the fire, so that releases some cash flow; and then, of course, there's also the insurance payout of $3 million, all right? So that brings the cash to a more comfortable position of $13.6 million. And that allow us to reduce our borrowings from $36.4 million last year to $28.5 million. That in turn brings our gearing down to 0.3x compared to -- net gearing up, 0.3x compared to 0.4x last year. As far as the liquidity is concerned, still quite sound, current ratio, 1.7. Inventory has come down. As I mentioned, we reduced the inventory before the fire. And of course, there's also the write-down of the inventory as a result of the fire. NTA now down to $0.3748 per share. Our cash flow remains quite comfortable. At the operating level, we continue to generate operating -- positive operating cash flow. As I mentioned, inventory reduction also contributes to the positive cash flow and then the insurance proceeds are $3 million. So at the operating level, positive $15.8 million. That enabled us to reduce the borrowings. The financing activities, basically the reduction of $11.6 million largely goes to reducing our bank borrowings. The other item is in September, we make an announcement that we invested in the company called JIOS Aerogel, the name of for that. Essentially, JIOS is an innovator in producing silica aerogel and the thermal blades that goes into your electric vehicles. And the purpose of that is to kind of what they call mitigate the thermal runaway, so reduce the spreading of the fire in the electric vehicles. But we went into this investment, not just for investment purpose but with a business angle because they are potentially a customer. So this is going to be a long-term -- medium- to long-term investment. Coming back to the cash flow. Therefore, the net effect is an increase in cash of $2.3 million and cash position, $13 million. That put us in a position to now better fund our -- the construction of -- the rebuild of the warehouse. Moving to the share price. Share price at the 20th of February, $0.485; our IPO price of $0.28; historical high, $0.68; historical low, $0.13; 52 weeks high, $0.55; 52 weeks low, $0.36. Earnings per share, negative $0.0443 per share. Therefore, the historical P/E is negative, not very relevant. Market cap now, $64.6 million. Price-to-book ratio, 1.29x. Share price, this is a 1-year chart up to 20th Feb. 20th Feb price was $0.485. One year ago, I think it was $0.55. Comparatively, the general market, the indicator for the Catalist, which is the red line, down 21%. ST All-Share's down about 3%. And we are down about 11.8%, roughly. Considering that we will be spending quite a bit on the reconstruction of the warehouse, we decided to conserve cash. And therefore, there will no dividend -- no final dividend for 2023, the first time that we are not paying dividend since our IPO. I thought I'd just share with all of you our share performance since our IPO. IPO price was $0.28. It surged shortly after that to about $0.68. And then now at $0.485, that's an increase of 73% since IPO. And our dividend track record since IPO, in total, we have paid $0.225. Okay. More importantly, what's going to be the outlook for 2024? Externally, the inflation pressure has eased. Central banks has kind of ended the monetary tightening cycle, but the interest rates are still quite elevated. And I think businesses are still feeling the pressure, the higher costs. For us, we have been paying, I think, over a 1-year period of 5% increase in the interest rate that we pay to the banks. So certainly, the business sentiment has not picked up significantly. Therefore, we foresee that the economy is -- any growth will be -- likely to be softer compared to last year. At the industry level, the excess inventory situation we've seen in the last year has kind of improved. But now the demand side is slowing. Therefore, we are seeing supply situation improving, but the demand side remains uncertain. Then you saw the Middle East conflict, those rebels who attacked the shipping vessels, resulting in the rerouting of the vessels. That has an impact on supply chain, delaying the shipment time and resulting in higher freight costs. That can also pose a risk to our recovery. Therefore, for us, we have to -- given the business conditions are uncertain, we have to be very cautious in the way we approach our business this year, coupled, of course, with the capital expenditure in rebuilding the warehouse. A note on the new warehouse. This warehouse will have a bigger storage capacity. It will increase our cost in the short term, but in the long run, it should result in the warehousing cost savings and therefore make us more competitive in the market. Of course, we will have to also put safety at the center of all the design of this new warehouse. A lot of safety features are going to be put in. We have appointed consultants to help us enhance the safety of the warehouse. Lastly, will also be a little bit greener, partly a requirement by JTC because this warehouse actually face the MRT track. So they want us to have some aesthetic value features on the building. So it will be safer and greener. I think that's about all I have to say.