Megachem Limited (5DS) Earnings Call Transcript & Summary

Very good morning to everyone. It is my pleasure to present to you Megachem's results for financial year 2025. For those who are not familiar with us, let me begin by giving you an overview of our business. Megachem is an integrated specialty chemical solutions provider. Essentially, there are three key features. We are in the business of specialty chemicals. Broadly speaking, the chemical industry can be classified into two main areas, the bulk commodity chemicals and the specialty chemicals. The specialty chemicals are more downstream products with higher value, whereas the bulk chemicals are upperstream products with lower value. Sometimes the specialty chemicals are referred to as performance chemicals or functional chemicals, and they are used essentially to enhance the function, quality or performance of a certain product. Secondly, we pride ourselves as a solution provider with the capability to offer an in-depth knowledge of our products and its functionality. Between the buying and selling of the products, there's a lot of knowledge that goes into it. So it's not just a case of sourcing a certain price and then put a markup and selling to our customers. There's a lot of knowledge that goes into the selling process. Thirdly, we provide integrated solutions through custom-blending services. And essentially, these are blending of products for our customers based on their formulation. Now what differentiates us, therefore, is firstly, our wide product portfolio, roughly about more than 2,000 product offerings in our portfolio. And therefore, we are able to be a one-stop solutions provider -- a one-stop supplier to our customers, providing a suite of products for them. Second, we are global's -- we have a global sourcing network through our Singapore office, China as well as the U.K. And this sourcing hubs helps to source for quality products throughout the world and then we distribute it to our markets. Thirdly, we are present in 11 countries around the world, mainly in Asia. Of the 11 countries, 8 are in Asia actually. So we are very much an Asia-centric business. We also have a very strong diversified customer base consisting of mainly MNC customers, which then enable us to scale up our business a little bit faster. And as I mentioned earlier, we provide value-added services through our custom-blending services, which we then provide to our customers. In terms of solutions, we provide what we call a vendor managed inventory solutions. Essentially, we hold inventory for our customers, and that helps to reduce the inventory holding costs. So this integrated model allows us to essentially capture margins across the supply value chain, deepen our customer engagement as well as ensuring supply reliability. And that help us to differentiate ourselves from our customers -- competitors who have pure trading business. And this structure has served us very well over the years and underpins our resilience across many industry cycles. Moving on to our market coverage. As I mentioned earlier, we have presence in 11 countries globally. We have a strong Asia-centric focus of the 11 countries we are in Asia, right? And this extensive geographic footprint position us in essentially in high manufacturing hubs. Essentially, our customers are manufacturers, right? So we position ourselves in markets where there's high manufacturing activities. Of course, we also position ourselves in the fast-growing economy such as in Asia. Therefore, through our strong network sourcing network and proximity to customers, we are able to serve our customers in multiple locations and ensuring the continuity of supply for our customers. Now if you look at the breakdown of our sales by geographic segments, again, I stress our strategy is very much Asia-centric. Of the 11 countries operated 8 are in Asia, which constitutes about 70% of our group sales. Within Asia, ASEAN makes up about 55% of our group sales, followed by North Asia 13%; South Asia, 3%. So that's Asia about 70%. The rest goes to Europe, which constitutes about 13%; Middle East 9%; Australia 7%. Our strategy, one core part of our strategy is essentially diversification. We diversify our market segments in terms of the industry that we cover, right? We cover more than like 20 industries across the market, including paint and ink, construction, electronics, automotive, oil and gas, rubber, plastics, pharmaceutical, F&B, flavors and fragrance. Essentially, chemical is a wide application and we cover quite a wide spectrum of that. Sales breakdown by the industry coverage. You can see in the chart here, 32% goes to the what we call Performance Coatings and Polymer and that's your paint and ink and so on. Then we have Surface Technology. That's partly goes into automotive industry and part of it goes into the electronics. So you can see in this chart that the diversification really provides us a natural risk balancing and resilience of our business. So that's the business background. Can I now move on to an update of our business in the year 2025, beginning first with the external economy. Now 2025 was shaped essentially by external volatility. The year was characterized by, as we all know, rising trade barriers leading to shift in global trade, geopolitical risk in the Middle East region, in Ukraine, then of course, there were hope that the China's economy will recover. And so far, in 2025, it's been -- the recovery has been quite sluggish. But despite these headwinds, global economic conditions turn out to be better than expected. As for the chemical industry, ongoing oversupply in the industry, right, gave rise to weak chemical prices. Essentially, over the last few years, the industry, there has been an oversupply of the chemicals and leading to softening of the prices. Then, of course, there was the U.S. trade tariffs and causing trade flow disruptions and then that led to business confidence waning throughout the year. As for Megachem, the U.S. tariff had quite minimal the direct impact on us as our sales to U.S. is quite insignificant. However, the indirect impact stems from the customers' difficulty in their inventory planning and leading to our sales being quite uneven throughout the year. But in spite of the external uncertainties, Megachem demonstrated resilience through disciplined cost management and strong operational execution. So that's the business update. Then we now move to our financial performance. First, let me recap. There was a fire in our warehouse in year 2023. And this table shows the impact of the fire on our P&L since then. The impact was felt mainly in the -- the fire happened in July 2023, and the impact was felt from then until end of 2024 and 2025, there was no impact. And 2025 was the year we started rebuilding the warehouse. So to-date, the impact is as follows: on the negative impact to the expenses and loss from the writing off of inventory and certain plants and equipment that's totaled about $15.3 million, as you can see in the table. Then we received insurance compensation of about $12.5 million roughly. So the net impact was a negative $2.8 million, up to date. There's one more last component to the insurance compensation. That's a consequential loss. And you can see that in the result announcement disclosure, we mentioned that we received another $1.2 million from our insurance as compensation for consequential loss. So that's going to be recorded in 2026. Now let me just run through quickly the P&L highlights before I delve deeper into the numbers. Firstly, on the second half sales compared to the first half of 2025. Second half sales fell $3.8 million or 5.8% compared to the first half of 2025. Net profit after tax was $2.2 million for the second half that's about $0.5 million or 27.4% higher than the first half. The next table shows the second half performance against the same period last year. So our second half sales was $3.4 million lower than the same period last year, while our net profit after tax was $3.7 million or 63.1% lower. Remember, I mentioned just now there was impact of the fire on our P&L. And in second half 2024, we received insurance compensation for the fire incidents of about $4.4 million recorded under other income. Adjusting for this, the net profit after tax for second half would have been $1.3 million. And our second half net profit after tax would effectively be $0.9 million or 67.1% higher. Then the full year P&L. The full year sales came in at about $124.4 million. That's $4.4 million or 3.4% lower, primarily due to softer chemical prices. And net profit after tax was $3.9 million, which is $4 million or 50.6% lower than last year, lower than FY '24. However, if we adjust FY '24 for the impact of the fire incident, net profit after tax for FY '25 would have been $1 million or 31.1% higher. Let me now delve deeper into the numbers, starting with the half yearly sales trend. I showed the sales trend over 3 years because the fire incident happened into the second half of 2023. And our concern at that time was how it would impact our sales activity. Fortunately, there was minimal impact as can be seen in the higher sales in second half 2023. We were able to do so because a major part of our inventory were actually stock in third-party warehouses. And also, we were able to draw inventory from our other operations overseas to supply to our customers. Thus, our confidence -- our customers continue to be confident in our business. And therefore, we could see the second half 2023, the sales were higher. And then the sales gained momentum into 2024, as you can see in the chart. Then of course, Trump was elected and then introduced U.S. tariffs and so on. That's in the first half of 2025. Following that, there was a bit of a front-loading of inventory by our customers in the -- mainly in the first half, but that faded towards the later part of 2025. And the unpredictability of the U.S. tariffs pose significant challenges to our customers' inventory and production planning, therefore, impacting also our business. As I mentioned also earlier on, the chemical industry faced oversupply, therefore, resulting in weak chemical prices, and that also weigh on our sales revenue. The next chart shows our yearly sales trend. I'd like to show this because it shows how our business evolved over the years and how we dealt with the various crisis throughout the years. As I mentioned earlier that our business model is built on diversification and resilience, and this can be seen in this chart. This chart demonstrates the resilience of our business. As you can see, the sales are more or less stable, but going over throughout the years. It also shows that we are able to rebound quite quickly from each crisis, such as after the U.S. crisis in the period 2008 and 2009. And also after the COVID in 2020, you could see that 2021, our sales rebounded quite a bit. Now let's analyze our sales in terms of our Geographic segments. The weaker demand were evident in ASEAN, which is our core of our markets and Australia market segments, whereas China and Middle East showed gain and they essentially bucked the trend. The rest of the markets were relatively flat. In terms of the business activities, both our business activities in distribution and manufacturing registered lower sales. A note here is that our sales revenue from manufacturing activity is actually fee-based. These are blendings services that we provide to our customers. And because the materials are mostly provided by our customers, we essentially book only the service fee that we provide to our customers. Therefore, the sales in the manufacturing activity is actually much lower in proportion to the distribution activity. Gross profit. I mentioned earlier that we operate in the specialty chemical space as opposed to the bulk commodity chemicals. And what distinguishes specialty chemicals from commodity chemicals is the higher and relatively stable profit margins. So historically, our gross profit margin hovers around 24% to 25%. As for 2025, our gross profit margin was 25.6%, and that's higher than 2024, mainly due to lower inventory provisions. As for expenses, it decreased $5.2 million or 15.1% to $29.2 million. We knew at the beginning of the year that we had to be prudent in our cost management because of the uncertainty in the external environment. So if you adjust for all the fire impact, our expenses actually fell by $1.1 million or 3.6%. Other income. In 2024, we received insurance compensation of about $9.4 million, but it was not in 2025. That explains then the lower other income. Next, our associates profits. Those who are new to us, we have an associated company in Thailand, which is listed in the stock exchange in Thailand. There results was just announced before ours, and it came in slightly lower than the year before. Now the net profit after tax. Now the 2024 net profit after tax was $7.9 million, you can see the chart here in the middle. This includes the expenses and insurance compensation arising from the fire incident. So if you adjust for that, the net profit after tax for FY '24 would have been $2.9 million. And if you compare the 2025 net profit after tax of $3.9 million is an effectively increase of $1 million or 31.1%. And this is attributed to the higher gross profit margin and the lower expenses. Now moving to our balance sheet. In our past, I think, 1 or 2 announcements, we mentioned that we have to be financially prudent, and that's the approach we took in 2025. If you look at the balance sheet side, there are a few things to highlight. One, our borrowing has increased, and that's because we took a bank loan to fund the reconstruction of the warehouse. And part of the funding for the warehouse construction came also from internal cash and resulting in a fall in our cash position from $16 million to $14 million. We also told ourselves that we had to be very prudent in our inventory management in view of the fact that the tariffs would have caused uncertainty in the customers' demand. So the prudent inventory management led to lower inventory for FY '25. Moving to our cash flow. Our profitable operation, coupled with the prudent inventory management enabled us to generate positive operating cash flow, which were used mainly to repay short-term borrowings, service our loan interest and pay some dividend to shareholders. On the CapEx side, progress payments totaling $13.5 million were made for the reconstruction of the warehouse. The funding for the warehouse came from the bank loans as well as our internal funds. So the net effect is a fall in our cash position from $15.3 million to $14 million. So that's the financial results. Let me now move to -- talk a little bit about our share performance. We were listed on the 17 October 2003 at an issue price of $0.28. Since then, the historical high has been $0.68, that's shortly after the IPO and the historical low of $0.13. In the last 52 weeks, the high was $0.50 and the low was $0.30. The price as at 23rd Feb, was $0.42. Earnings per share, $0.0288 that translates into a historical P/E of about 14.6x and market cap of $56 million. NTA per share, $0.46 translates into a price book ratio of 0.91x. The next chart shows the share price performance over the 1 year -- last 1 year until 23rd Feb. So 1 year ago, I think it's probably about $0.38 or so. And as at 23rd Feb, $0.42. This chart shows the -- our performance against the ST All-shares as well as the ST Catalist shares. The top line there is the Catalist. Over a 1-year period, it appreciated by 30%. The ST All-shares is about 28% and our share price appreciated less about 7%. Those who have been holding our shares for a long time, you know that we have been paying dividend quite consistently. We -- for the final dividend of 2025, we will declare another $0.005, adding on to the interim dividend of $0.005. So that brings the total dividend for FY 2025 to $0.01 per share. That translates to a yield of about 2.38% roughly taking the share price at [ $0.42 ] about 2.38% yield. The dividend payout is about 34.8%. I'd like to look at the -- our share performance over a longer horizon. This chart shows our IPO price at $0.28 and price as at 23rd Feb was $0.42, right? So over the period of time since IPO, the price has appreciated 50%. And I mentioned we've been paying dividend consistently. If you look at this chart, IPO in 2003. Every year, we've been paying dividend except the 2023 when we had a fire. So overall, the years been since we were listed, the dividend paid was $0.245. I understand some investors look at the total shareholders' return. So I make some calculation. The share price gain since IPO, $0.14, dividend paid since IPO $0.245. That gives a total shareholders' return since our IPO of 137.5%. It demonstrates that we are very focused on delivering long-term shareholders' value by building sound fundamentals, letting the fundamentals drive the valuation as well as paying a consistent dividend to shareholders. I think next, it's what probably you'll be more interested in. Next, what's the outlook for 2026. First, looking at the macro environment. The external environment remains quite uncertain, as you all would have known. The trade tension has not eased. It's been a flip flop policies coming from the U.S. over the -- since Trump came into -- became the President. And then the geopolitical risk has remained at an elevated level. I also would like to mention that the job markets -- there's been talk about AI disruption. Therefore, the job markets seem a little bit fragile in some of the major economies. And of course, there's also concerns over the AI bubbles, whether the valuations are really too high for AI stocks, especially in the U.S. At the chemical industry level, if oversupply does not ease, then the chemical prices will remain weak. Our focus then is for manufacturing activities to pick up and then demand can also increase. As for Megachem, our business -- the chemical industry as well actually, it has a close correlation between our chemical industry and the overall economy. If the economy continues to grow, it will provide support to our business. However, if external adversities do not arise -- if external adversities arise, we will -- it will affect our business, and therefore, we have to respond with a bit more operational and financial discipline so that our sound fundamentals remain intact. In the long run, we hope to leverage our strength in the geographic network and our customer -- fairly strong customer base and our product offerings to accelerate our growth. So that's the plan, but how do we then accelerate our growth? How do we unlock our potential because there's a lot of potentials in our business, but how do we unlock them? Let me just share some insights of how we plan to do this. Firstly, on this chart, it shows the global manufacturing output. And you can see that there's China, U.S., EU, ASEAN, India. Now in the ASEAN, if you total the ASEAN, the EU, China and India, that makes up about 50% of the total global manufacturing output and Megachem has presence in all these markets. So that gives us a fairly strong strategic positioning and access to the high-growth economies. So what are our pillars of growth? I think 2 main areas, high-growth markets and high-growth industries. In the high-growth markets, we are identifying markets like Malaysia, Indonesia and Vietnam. Why? Because as a result of the tariff that is imposed by U.S., ASEAN countries enjoy some slight advantage over other countries. Also in ASEAN countries such as Indonesia, Vietnam, the cost of doing business and production and it's lower than most other countries. Adding to that, this country has very young populations, the booming middle class, will then be one of the key growth drivers for this region. Adding to that, there's going to be a rapid growth in foreign investments and production output in this region as many businesses start to recalibrate their supply chain and production base. The next pillar of growth is our -- the industries that we sell our products to. And the high-growth areas we identify are the electronics, and we all know that the AI boom and the robotics and so on, they all require semiconductors and chemicals are used in semiconductors. Then the automotive, the electric vehicles in years to come is really taking place, but in years to come, more users will be switching to electric vehicles. So specialty chemicals are increasingly being developed for lightweight materials to be used in EVs, electronics and also in robotics, even in aircraft actually. Then another area is life science. Specifically, we're talking about the pharmaceutical, personal care products. Why? Because of the aging population around the world. As a closing remark, 2026 will be another unpredictable year. However, our long-term prospects, I think, should remain intact as we seek to build sustainable chemistry for long-term growth as I have covered this now. I think that ends my presentation. Thank you for your time, and see you in the next briefing.