Megachem Limited (5DS) Earnings Call Transcript & Summary

Hello, and welcome to Megachem's results briefing for the first half of 2025. First, let's take a look at the -- an overview of the external environment and a bit of an update of our business, starting with the global economy. We started the year with hopes that the economic growth will continue with good growth, but that the hopes were [ dashed ] by the tariffs that U.S. imposed on the rest of the world, which caused a bit of chaos and confusion in the market. In addition, the geopolitical conflicts in the Middle East, Ukraine exacerbated the situation. And while there is hope that China's economy will recover and provide some support to the global economy, but the recovery so far in China has been fairly uneven. As for the industry, it went through a series of capacity and inventory readjustment post-COVID and then it kind of shifted to a normalization phase in 2024, leading to a recovery in demand for chemicals. But then this year, we faced another round of supply chain disruption caused by the U.S. tariffs, which then led to business confidence dropping and the demand for chemicals also fell. For Megachem, what is the impact of the U.S. tariff on us? The direct impact of the U.S. tariff has been minimal as our sales to the U.S. market as well as our import of chemical products from U.S. into China, it's quite insignificant. However, there's obviously the indirect impact that stems from the difficulty in inventory planning for our customers who export, especially for those who export to U.S. Now let me provide an update on the rebuilding of our warehouse following the fire incident that took place in July 2023. We have commenced the structural work following the completion of the piling phase. If all goes as planned, we target to complete the construction by end of this year. Now -- let us now go straight into our financial results. First, looking at the impact of the fire on our P&L. Firstly, all the costs and expenses totaling about SGD 15.3 million arising from the fire incident up to the commencement of the warehouse construction. All that has been captured already in the financial statements in the first half 2023 and in the full year of 2024. Therefore, in the first half of this year, there was no further impact on our P&L. As for the insurance compensation, we have received in total SGD 12.5 million in the period of second half 2023 up to the end of 2024. And again, first half of this year, we did not receive any compensation from our insurer. So so far, the net effect is a negative impact of about SGD 2.8 million so far. Now against that backdrop, how do we [ fare ]? Year-on-year, the external uncertainties caused our sales in the first half to drop marginally by about SGD 1.1 million or 1.7%. Now despite the lower sales, gross profit went up by about SGD 600,000, roughly 3.6% due to higher gross profit margin. Now if you look at the bottom line, we registered profit after tax of SGD 1.7 million for the first half 2025 compared to SGD 2 million in the first half 2024. However, as I mentioned earlier on, there were impact of the fire on the first half last year's results. So if we exclude the impact of the fire in first half 2024, the net profit after tax would be the same as the last year. So SGD 1.7 million in first half this year against SGD 1.7 million first half last year, if you adjust for the impact of the fire. Now if you compare sequentially then the first half results, the sales rather was actually SGD 0.4 million or 0.6% higher. Going down to the bottom line, net profit after tax in the first half was SGD 4.2 million or 71% lower than second half last year. Again, if you adjust for the impact of the fire in the second half of 2024, then net profit after tax will be SGD 400,000 or 31% roughly higher than second half last year. Let us now delve deeper into the numbers. This chart shows the sales trend pre and post-COVID. I thought it was quite meaningful to look at our sales trend prior to COVID and after the COVID. To recap, as the COVID restrictions were gradually removed, sales recovered strongly in 2021, up to the first half of 2022 as customers began restocking their inventory and prices escalated in response to the surge in the consumer spending. However, supply soon exceeded demand, leading to inventory overhang. And then the restocking then shifted to destocking. Consequently, you can see in the chart, our sales fell in second half 2022 up to the first half 2023. And before the inventory levels started normalizing and then you will see our sales kind of stabilizing subsequently. Then going into 2025, uncertainty over the U.S. trade policies kept our ability to grow our business. However, if you compare our sales now against pre-COVID level, we are still higher than pre-COVID level. Let us now give you an insight into our market coverage. This slide shows where our business are sold to. While our sales has a global reach, our strategy is primarily Asia-centric, supported by an extensive network in Asia. As you can see in the slides, out of the 12 countries in which we operate, 9 are in Asia, which is the fastest-growing region and which presents a tremendous potential for long-term growth. Of all the markets, ASEAN makes up about 58% (sic) [ 56% ] of our sales; followed by Europe, 13%; North China, which is -- North Asia, which is primarily China, 12%; Middle East, 10%; Australia, 6%; and lastly, South Asia, which is mainly India, 3%. Therefore, you can see the spread that actually Asia constitutes a big part of our business, about 70% of our sales come from Asia. Now you look at our performance of each of the market segments in the first half this year. You can see the ASEAN and Australian markets experienced sequential fall in the last -- this first half as well as -- yes, over the 2 periods of the first -- second half last year and first half this year. But marking the downward trend was China as the economy started its gradual recovery and also Middle East, which also saw sequential growth. The other markets were relatively flat. And the other way in which we segment our business is by industries to which we sell our products to. So broadly, these are performance coatings and polymers. This includes industry like paint and ink, constructions and polymerization. And then we have surface technology, which is the electronics, metal finishing, which most of it go into automotive and so on. And then the industrial cleaning. We also have what we call resources and oil and gas, that's the refinery, petrochemicals, lubricant and grease mining. Then advanced polymer composites are your rubber and plastics. Biotech is a big industry. It consists of F&B, pharmaceutical, flavor and fragrance, nutraceutical as well as cosmeceutical. And the breakdown of the industry coverage. You will see that it's quite diversified. The performance coating and polymers contribute about 32%, followed by surface technology, 27%; biotech 21%; oil and gas, 8%; and lastly, the advanced polymer 8%. So the industry coverage is fairly diversified, which then provides some stability and resilience to our business. Next, in terms of the business activity, the fall in sales came from both the distribution and the manufacturing activities. Our manufacturing activities essentially are custom blending services to our customers. It's kind of a value-added services. We produce the products based on the customers' formulation. Therefore, it is mainly a fee-based business. Looking at our gross profit margin, you can see that our margins remains at a healthy level of about 24% to 25%. Bear in mind that we are selling what we call specialty chemicals, higher value, and therefore, it commands bigger margins compared to the general commodity chemicals, which usually come at lower margins. Moving on to expenses. I think the key things to highlight is if you look at the first half '24 expenses, it includes demolition costs and waste disposal costs. These are related to the fire incident, but we didn't have that in the first half this year. And then finance costs because borrowing has come down and interest rate has also fallen. Therefore, the finance cost has also decreased. Next, perhaps warehouse charges. Because of the fire, we had to store some of -- most of our products in the third-party warehouse and that contributed to higher warehouse costs in the last few years. But when the new warehouse is ready, then you will see a fall in the warehouse charges. Next on other income. Again, looking at the impact of the fire. First half last year, we received insurance compensation, roughly about SGD 5 million, right? But we didn't have that in the first half of this year. Next, we have an associated company in Thailand, which also distribute chemicals to the Thai market. They are also listed in stock exchange. They just recently announced their results and the results came in relatively flat despite a fairly soft economy in Thailand now. Now moving on to the bottom line very quickly. As I mentioned, our first half net profit after tax came in at about SGD 1.7 million, same level as first half last year comparing to the adjusted profit last year. And compared to second half last year, we had higher profit by about SGD 400,000, and that's due to higher sales and essentially lower expenses. So effectively, our results, bottom line, same as last year first half, but higher than second half last year. Okay. That's the P&L. Now let me move to our balance sheet. Very important. We mentioned in our recent result announcements that we had to be financially disciplined as we embark on the rebuilding of the warehouse. So that's kind of reflected in our financial conditions. Firstly, you look at our liquidity ratio, current ratio is still quite some at 1.8x. Our cash still fairly healthy at SGD 14.2 million. And then the gearing, net gearing now at 0.25x still [ at ] acceptable level. And in terms of inventory management, I have mentioned, I think, before and also in recent announcements that we will be focusing on inventory management in response to the changes in the market conditions. So we have also brought that down to a more manageable level in terms of the inventory, it has fallen by about -- from SGD 32 million to about SGD 28 million. And the inventory turnover days from 147 to 142 days. Next, let's look at the cash flow statement. Essentially, in the first half this year, our main CapEx is the rebuilding of our warehouse. About SGD 6 million plus was spent on the warehouse construction. It's not completed yet. That's still in progress. And that's partly funded by bank loans as well as internal funds. Other than that, of course, we generated -- I mentioned just now that we manage our inventory fairly prudently and resulting in better working capital cycle. Therefore, operating level, our cash flow is positive. And that allows to partly fund the reconstruction of warehouse, also to pay dividends to our shareholders. So the net effect is a decrease in cash of about SGD 100,000. Currently, cash position stands at SGD 14 million, which will be deployed in subsequent in the second half mostly for the reconstruction of the warehouse. I think that's the financial results. Now let me move to the share performance. For those who are not -- who are new to us, we were listed in -- on the 17th October 2003. Our IPO price was SGD 0.28. It rose to a high of SGD 0.68 shortly. And then over the years, it has kind of stabilized now as at 12th August, the share price is SGD 0.41. Earnings per share, SGD 0.0126, and that translates into a historical P/E of 7.2x. Market cap based on price of SGD 0.41 now stands at SGD 54.6 million. NTA SGD 0.4397. Therefore, we are trading below the book value. The price-to-book ratio is SGD 0.0093 -- 0.93x. Next, looking at our share price over the 1-year period. Now SGD 0.41, 1 year ago at SGD 0.30 [ or more ], SGD 0.36, SGD 0.37 roughly. And how do we -- [ how did ] our share price perform compared to the overall market prices. Megachem with over 1 year, up 10.8%. The Catalyst shares down -- sorry, up 7.1% roughly and the overall market shares higher over 1-year period, 27.5% roughly. Coming to our dividend for the interim dividend, we will pay SGD 0.05 per share. That translates to a payout ratio of about 39.6% and a yield of on an unannualized basis, 1.2%. Just to have a sense of how our share price performed since IPO. Remember, I mentioned just our IPO price of SGD 0.28. It went up as high as SGD 0.68. And then now if you compare IPO price until now, it has gained 46% roughly. In terms of dividend return to our shareholders, we've been paying dividends since IPO, except for 2023 when we had a fire incident, which we did not pay a dividend in that year, but we have since resumed our dividend payments. So last year was SGD 0.01 for financial 2024. So far this year interim SGD 0.05. And I think finally, let's -- what's the outlook for our business in the second half. I think the global economy still probably face a bit of a downside risk as the political conflicts, the trade protectionism arising from U.S. trade tariffs as well as the uneven economic recovery in China continue to pose a threat to our -- to the economy. As for the chemical industry, chemical products goes to a wide range of industries and is largely dependent on manufacturing activities. And if you have read in the news in recent months, global manufacturing activities are beginning to show some signs of weakness. Therefore, the demand for chemicals may fall in tandem with the overall economic conditions. And Megachem business is built on the diversified business model. Our products are sold to a wide spectrum of industries. Therefore, our business prospects is very much inextricably linked to the overall economy. Hence, any deterioration in economic conditions may dampen our growth outlook. [ And then on ] how should we respond? We will brace ourselves for the ongoing uncertainties by diversifying our supply sources and deepening our market coverage in Asia where we see the most potential in growth. And of course, we will continue to maintain financial discipline in the face of such uncertainties in [ external ] markets. I think that ends my presentation. Thank you for your time. See you next time.