Megachem Limited (5DS) Earnings Call Transcript & Summary

Hello, and good morning. It is our pleasure to present to you Megachem's results for financial year 2024. Let me begin by sharing review and overview of the external environment and a brief update of our business. Starting with the global economy, it's been fairly resilient in 2024. It continues on its moderate growth trajectory despite high interest rates and ongoing geopolitical conflicts. At chemical industry level, the industry went through a series of adjustments post-COVID from the period of inventory restocking in the aftermath of the pandemic to destocking in 2023 after the industry faced oversupply and inventory overhang. These then shifted to a normalization phase in 2024 and leading to a recovery in the demand for chemicals. And for Megachem, it was a year of recovery. Following a fire incident in July 2023, our diversified business model enabled us to continue our business relatively without much of disruption, so leading to continued customers' confidence in us. Consequently, orders from our customers picked up as they started to replenish their stocks. Now let me provide you an update of the rebuilding of our warehouse after the fire incident. So after spending much time demolishing the remaining structure of the building, decontaminating the waste and disposing the waste, we have completed the [ piling ] work, and we have now just recently commenced the structural work. If all goes as planned, we target to complete the construction by end of this year. On the insurance front, we have been receiving progressive payments from our insurer, which I'll share a bit more details later on. Now let us look at our financial results. Here's a summary of the impact of the fire on our P&L. This will enable us to understand the numbers better in the subsequent slides. So after the fire, we had to write off value of the assets that were destroyed in the fire. This includes stocks, property, plant and equipment. As well, we incurred some expenses for the disposal of the waste and for the demolition of the remaining structure as well as the disposal of the waste. So total expenses relating to the fire amounted to about $15.2 million. And on the flip side, we have been receiving insurance compensation totaling about $12.5 million. So the net effect is a negative impact of about $2.8 million so far. Now against that backdrop, how do we fare? So year-on-year sales in the second half of 2024 increased $1.4 million or 2.2%. Along with that, gross profit went up by $2.1 million or 15.9%. Moving to the bottom line, the net profit after tax came in at $5.9 million for the second half of 2024 compared to a loss of $6.7 million for the same period last year. However, if we exclude the impact of the fire, then the net profit after tax was $1.3 million, which is 29.3% higher than the same period last year. Comparing sequentially, second-half sales was $1.5 million or 2.3% lower. There seems to be a more cautious market sentiment towards the end of the year, sometime in the fourth quarter of last year. So net profit after tax in the second half 2024 was $3.9 million higher than the first half 2024. Adjusting for the impact of the fire, net profit after tax in second half was $1.3 million, which is $0.4 million or 21.7% lower than the first half. For the full year, sales came in at $128.8 million, an increase of $5.8 million or 4.7%. Gross profit increased $8.7 million. But if we adjust for the impact of the fire, it was an increase of $3 million or 10.7%. Expenses higher $1.7 million, 5.3%. The adjusted expenses were actually $2.7 million or 9.6% higher. Now we have other income, which includes the insurance compensation of about $9.3 million. Excluding the insurance compensation, other income was $1.3 million. The net profit after tax came in at $7.9 million vis-a-vis a loss of $5.8 million in 2023. None of the fire impact were recorded in the second half of 2023 because the fire happened in July '23. Adjusting for the fire incident, net profit after tax would have been $2.9 million, which is an increase of $1 million or 53.5%. The increase is attributed to the higher sales and the better gross profit margins. Let me now delve deeper into the numbers. This chart shows the sales trend over the last 3 years. To recap, as COVID restrictions were gradually removed, sales recovered strongly from the period of second half 2021 to the first half of 2022 as customers began to restock inventory and prices escalated. However, supply soon exceeded demand, leading to inventory overhang. So the restocking then shifted to a destocking. And consequently, our sales fell in the second half of 2022 and up to the period of first half 2023 before we saw a recovery in the demand in the second half of 2023. And that went on until sometime in the third quarter of last year as inventory levels started to normalize. However, as I mentioned earlier, the business sentiment seem to be a bit cautious towards the end of 2024. And that resulted in the lower sales in the second half. This is my favorite chart. It shows a strong recovery in our business after each crisis, such as in 2010 after the U.S. crisis and in 2021 after the COVID pandemic. It demonstrates our agility in seizing opportunities amid adversity as well as the resilience and robustness of our business model. The growth in 2024 was quite broad-based across our key markets as well such as in ASEAN and North Asia. Now it mirrors the overall recovery of the market conditions. In terms of the business activities, the growth in sales came from both our distribution as well as our manufacturing activities, which is essentially custom blending services, kind of value-added services to our customers. Now our business strategy is Asia-centric focus, supported by an extensive network in Asia. Of the 12 countries in which we operate in, 9 are in Asia. We are, therefore, able to leverage on this extensive network to take advantage of the growth opportunities, especially in Asia. The other way in which we segment our business is by industries to which we sell our products. Broadly, these are the what we call performance coatings and polymers. This includes industries such as paint and construction adhesives, then the advanced polymer composites that includes the plastics and rubber. [ Surface ] technology would be industries like electronics, metal finishing, industrial cleaning, water treatment. And of course, we have biotech. And within biotech, there's flavors and fragrance, food and beverage, pharmaceutical, personal care, nutraceutical and so on. And lastly, the resources, oil and gas segment that includes petrochemicals, lubricants and to some extent, mining. So you can see the industry coverage, it's quite diversified, which therefore provides the stability and resilience to our business. Our gross profit margin usually average about 23%, 24%, but dipped to 14.7% in 2023 due to the write-off of inventory that were destroyed in the fire. If you adjust the margins for the impact of the fire, then actually '23 margins will be 23.1% and will be 24.5% in 2024. Therefore, you can see that the margins generally average about 24%. The total expenses increased by about $1.7 million or 5.3%. Excluding expenses arising from the impact of the fire, expenses increased by $2.7 million or 9.8%. The key areas are the demolition costs relating to the fire, the customers claim. There were some stocks in our warehouse and those were also destroyed in the fire, loss of some property, which will also -- were destroyed in the fire. Then of course, there is the disposal cost. The chemical waste disposal cost is quite costly. And because the warehouse was destroyed in the fire, right, we had to keep more stocks in third-party warehouse, resulting in higher warehouse charges. On the currency front, some losses in 2024, a bit higher than 2023. And that's due mainly to the stronger U.S. dollar, especially towards the end of the year after Trump was reelected as the President of U.S. Our other income increased $7 million, mainly due to higher insurance claim, amounting to about $9.3 million. Now in the second half of last -- second half of 2023, we received $3.1 million from our insurer and $9.3 million in 2024. That adds up to about [ $12.3 million ] so far. Our associate in Thailand, which is listed in the Thai Stock Exchange, their results came in relatively flat for 2024. Now this chart shows the adjusted profit after adjusting for the fire. So last year, there was a loss -- I mean, 2023, there was a loss. But if you adjust for the fire, actually, there was a profit of $1.9 million. And then for 2024, because we received insurance compensation, that kind of supported -- that kind of contributed to the net profit of $7.9 million. But if you adjust for that, then net profit actually would have been $2.9 million, which is an increase of $1 million, 53.5%. So the increase, as I mentioned earlier, is due to the higher sales and better gross profit margin. So effectively, we did better in 2024. Moving on to our balance sheet. In our result announcement for financial year 2023, we mentioned that we had to be financially disciplined as we embark on the rebuilding of our warehouse. As a result, our financial condition remains healthy despite the fire incident in 2023. Cash position, as you can see in the table, strengthened as we conserved cash for the warehouse reconstruction. Borrowing was also lower, leading to lower gearing. Our liquidity, as you can see in the current ratio, is still sound. We adopted a very prudent inventory management in view of the uncertain markets condition, which helped us to reduce our inventory turnover days from 170 days to 147 days, thus improving our working capital cycle and the cash flow. The NTA now at $0.4392 higher than last -- than FY '23. Remember, the assets, the [ fight ] to paid in July 2023, so the assets were all written down and were all written down in the second half of 2023. And that's why the NTA was much lower in financial year 2023. Finally, moving on to the cash flow. Now we generated a positive operating cash flow, which helped us to reduce the borrowings. And then I mentioned, we have insurance payout from our insurer. It was used primarily for the payments of decontamination and disposal costs as well as partly for the construction of the warehouse. So the net effect is an increase in cash of about $2.1 million, bringing our net cash position to $15.3 million. So that was the financial result. Now let me share with you our share price -- our share performance. For those who are not so familiar with us, we were listed in 17 October 2023. IPO price was $0.28. It reached a historical high of $0.28 and a low of $0.13. The last 52 weeks high was $0.49 and low was $0.28. Price as at 19th of February 2025 was $0.395. I think yesterday, we also closed at the same price. Earnings per share for FY '24 stands at $0.0593 to a historical of 6.7x. The market cap as at 19 Feb, $52.6 million, NTA $0.4392 and the price -- therefore, the price-book ratio is actually trading below the book value of 0.9x, price-to-book ratio is 0.9x. This is a pie chart over the last 1 year up to 19 Feb. I think the high was $0.49, and then it dropped to yesterday's close 0.395. Relative to the ST all shares index as well as relative to the Catalyst index, our share price performed weaker than the overall market. Moving on to dividend. We paid the interim dividend $0.05. The final dividend will also be $0.05. That brings the total dividend for financial year 2024 to $0.01. Last year, we didn't pay dividend. So this year, we have resumed the dividend payment. The payout for -- the dividend payout is about 46%. Now this chart gives you an idea of how our share price has performed since IPO. IPO price $0.28, now $0.395. That's a price acquisition of 41.1% since IPO. And those who have been following us will know that we've been paying dividend consistently since IPO, except for last -- except for 2023, when the fire took place, we didn't pay dividend. So 2024, we have resumed the dividend payment, and we are paying $0.01 for the full year 2024. That's lower than in the recent years, and that's because we need to kind of conserve cash for the warehouse rebuilding. Now, how is the outlook for 2025? First, at the macroeconomic level, the global economy -- but there could be obstacles ahead of us in terms of the political conflicts in Ukraine and the Middle East region still not fully resolved. And then, of course, there are concerns that the U.S. trade policies may change under the Trump presidency, and sluggish economic recovery. So those factors could pose a threat to the global economy growth trajectory. As for the industry, we -- industry face kind of a supply chain disruption arising from the Middle East conflict. And that has not been fully resolved. Therefore, we may continue to face supply chain risk going into 2020 this year. Therefore, managing supply chain and inventory remains challenging in the current year. And continued growth for the industry will depend on this, since chemicals are used in a wide spectrum of industries. Now given the supply chain challenges the industry face and the uncertainty in the market conditions, our focus will be very much on the prudent inventory management. Now Megachem's business is built on a diversified business model. Our chemical products are sold to a wide spectrum of industries. So our business prospects is very much linked to the chemical industry and the overall economy. If the conditions in the global economy and industry remain positive, then the recovery momentum that we saw in 2024 may remain intact in 2025. However, any deterioration in the economic growth could alter the picture of our growth outlook. I think on that note, to summarize, we will have to brace ourselves for the ongoing uncertainties with tenacity and [ grit ] and with a view to build a long-term sustainable growth for Megachem. With that, I end my presentation. I see you on the next briefing. Thank you.