Megachem Limited (5DS) Earnings Call Transcript & Summary

So very good afternoon to all. My pleasure to present to you Megachem's financial results for the first half of 2026. Let me first begin with an update of our business. First, looking at the macroeconomic environment, the external uncertainty, which we saw in 2025 continue into 2026, marked by unpredictable U.S. trade policies and geopolitical conflict in the Middle East, in particular, the war in Iran. On the other hand, lower interest rates provided a stimulus to global economy and helped to ease the cost pressure on businesses. All in all, the conditions in the external environment were quite mixed. In fact, it did not turn out as bad as we had earlier shared at the beginning of the war in Iran. As for the chemical industry, trade flow disruptions caused by the Middle East tension led to rising energy and supply chain costs and the oversupply of chemicals, which we saw during 2025 started to ease into first half of 2026, resulting in recovery in chemical prices. On the demand side, the uncertainty in the Middle East situation made it very challenging for many businesses to plan their inventory, leading to unpredictable demand for chemicals. As for Megachem, our Middle East business faced initial uncertainty in the immediate aftermath of the Iran war, soon business recovered as customers started to replenish their inventory. Nevertheless, the impact of the Middle East crisis was very much mitigated by our Asia-centric business model. In fact, our sales to the Middle East market constitutes only about 10% of our group sales. And on the supply side, most of our supply comes from Asia, such as in China, Japan and Korea. And following the war in Iran, some front loading by customers as well as the chemical price recovery contributed to better performance in the first half of 2026. So in spite of the external uncertainties, Megachem demonstrated resilience through a diversified business model and strong operational execution. And lastly, to recap warehouse in Singapore caught fire sometime in July 2023. Following a period of reconstruction, we have been granted the permission -- the permit to start operations sometime in June this year. And subsequently, we have transferred a major part of our stocks from third-party warehouse to our warehouse, which will result in cost savings and greater operational efficiency. Now let me move on to the financial results. Beginning first with the impact of the fire on our P&L so far. So the total cost and losses resulting from the fire amounted to about $15.3 million, whereas on the insurance compensation side, we received another $1.2 million compensation of sometimes earlier this year, bringing our total compensation so far to about $13.7 million. So the net impact is a negative of $1.6 million on our P&L since the fire. Now this excludes the cost of the construction of warehouse. Now let me give you some highlights of our P&L for the first half of 2026. The sales came in at about $65.9 million, an increase of $1.8 million or 2.8% year-on-year. Gross profit margin was 3.5 percentage points higher and in other income is an amount of $1.2 million. This is the insurance compensation I mentioned earlier from the -- for the fire incident. As a result of the higher sales gross profit margin and the insurance compensation, net profit after tax increased $2.9 million or 167.9% to $4.6 million. Now if we exclude the insurance compensation, net profit after tax would have been $3.4 million, which is $1.7 million or 100% higher. Let me now delve a bit deeper into the numbers, starting with the half yearly sales trend. Following the U.S. tariff announcement in early part of 2025, there was a bit of a front loading inventory but that fade into the second half of 2025, leading to a fall in our sales in the second half of 2025. And the unpredictability of U.S. tariff pose quite a bit of challenge to our customers' inventory and production planning. As for the chemical industry, the oversupply resulted in weak chemical prices, which then weigh on our sales in second half of 2025. Now going to 2026, the U.S. gave us another shocking event by attacking Iran. It disrupted supply chain and trade flows, energy and freight costs escalated and as supply chemical prices recovered, which then contributed to the -- partly contributed to the higher sales in the first half 2026. Now the impact of the Middle East tension though not significant was mitigated by our Asia-centric business model, as I mentioned just now, a large part of our supply and our sales are actually in Asia. Our business strategy is very much ASEAN as you can see in the pie chart here. Of the 11 countries which we are operating in our ASEAN, which constitutes about 20% of our group sales. And within Asia, ASEAN makes up about 55% of total group sales, followed by North Asia with 11% and the rest of the sales goes to Europe, which contributes about 14%, Middle East 11%, Australia 6% and lastly, South Asia about 2%. So very much Asia-centric focus. This chart shows the breakdown of the sales growth by geographic regions. The strongest sales were in our ASEAN, Europe and Middle East. The rest, the North Asia and South Asia fell marginally. I think our business was, in fact, relatively unscathed despite the Iran war and that's mainly due to our Asia-centric business model. Megachem has 2 main business activities. The main one is distribution. The other is the manufacturing activities, which essentially is a custom blending services which we provide to our customers based on their chemical formulation. So although the sales from the manufacturing activity is actually mainly fee based Therefore, if you look at sales in comparison to distribution, it's a lot lower. So the higher sales came mainly from distribution activities, whereas the sales from manufacturing activities was quite flat. Now I mentioned earlier, our gross profit margin improved by about 3 -- close to 3 percentage points roughly. Now in chemical industry, a decision has to be made between commodity chemicals and specialty chemicals. For Megachem, we operate in the specialty chemical space as opposed to bulk commodity chemicals. Now what distinguishes specialty chemicals from commodity chemicals is the higher and relatively stable profit margins that we get from specialty chemicals. Historically, our gross profit margin hovers around 24%, 25%. For the first half this year, our gross profit margin came in higher, and that's due mainly to our ability to fulfill customers' orders following the war in Iran and we were able to fulfill orders from existing stocks with lower cost and selling at higher prices and that contributes to the higher margins. The other factor is the fact that we were write -- in the first half, we -- there was a write-back of inventory impairments, marginal write-back compared to some provisions last year. Moving on to expenses. Expenses increased by $1.3 million or 8.7%. The increase was mainly in higher depreciation following the completion of the new warehouse. Of course, transport charges also went up in line with higher energy costs. Staff costs, yes, it also went up. On the other hand, we will start to see lower warehousing costs as we transfer our inventory from third-party warehouse to our own warehouse. In other income, we received compensation from our insurance of $1.2 million, which explains the higher income which we see on the charts. Other than that, higher other income looking from the interest and grant income. This chart shows the contribution from our associate company in Thailand. For those who are not very familiar with us, we have an associated company in Thailand, which is listed in the stock exchange. They reported better results in the first half. Hence, our share of the profit also increased accordingly. So our first half net profit after tax came in at about $4.6 million, and this includes the insurance compensation arising from the fire of $1.2 million. When we adjust for that net profit after tax would have been $3.4 million, which is $1.7 million or 100% higher year-on-year. It is also higher than the second half last year by $1.2 million or 57.3%. This is attributed to the higher sales across some of our major markets, ASEAN, Europe, Middle East and the higher gross profit margin. On the balance sheet front, there are a few things to highlight. One, our borrowing has increased as we took a bank loan to fund -- to partially fund the reconstruction of our warehouse, leading to marginally higher gearing. Net gearing now is about 0.38x, which is still within a fairly acceptable level. When you look at the current ratio and cash position, I think it suggests that the liquidity is still quite sound. Now going forward, we will continue to maintain prudent financial management given the uncertainty in the ASEAN environment. Moving on to our cash flow operating level. Our profitable operations coupled with prudent inventory management enable us to generate positive operating cash flow. On the CapEx side, further progress payments were made for the reconstruction of the warehouse and the funding of the warehouse, for the construction of the warehouse came from bank loans and internal funds. And the net effect is that our cash position remains more or less at about the $14 million level. Let me now share with you our share price performance. To recap, we were listed in October 2003, our IPO price was $0.28 within the first -- during the initial period after IPO, the price shot up to $0.68 and the last 52 weeks high was $0.50, low was $0.40. The price as at 12 August, $0.45. I think yesterday's closing was $0.52. The earnings per share, $0.0342, historical PE 8.9x. I think relative to the market. Market is probably doing at about 15x if I get my numbers correct. So market cap as at 12th August was about $60million, NTA is $0.4875, therefore our share price is now trading below our NTAs. The price-to-book ratio is 0.92x. This chart shows the share price over a 1-year period up to 12th August 2026. One year ago, the price was at about $0.41, one year later as at 12th August is $0.45. As I mentioned yesterday's closing was $0.52. This chart shows our share price performance relative to the general market. The green line shows Megachem share price, 1 year performance. The red line is the ST All-Share and the blue line is ST Catalist Index. So Megachem share price has appreciated about 9% over 1 year. Catalist is about 22% and the ST All-Share is about 34%. Now we're going to dividend. We've been paying dividend consistently since our IPO, in fact every year except 2023 when we had a fire and we decided at that time that we should conserve cash to try -- to rebuild the plant, rather. So for this year first half, we will pay $0.005 per share. That translates to a dividend yield of 1.1% unannualized. And payout of 14.6%. Now what's the outlook for the second half. Looking ahead, many has predicted that the global economy will continue to grow, though at a slower pace, essentially backed by continued expansion in AI and technology sectors. A lot of money has been invested in AI infrastructure. So that said and total benefit in chemical industry. However, the growth may be fragile since the trade tensions has not eased and you would have read in the last few days, the tension has kind of escalated in fact. I'm sorry, the trade tensions has not eased, but the geopolitical risk remain at the elevated level. And potentially, there are concerns in the world, stagflation will then hamper the consumer spending and business confidence. In the chemical industry level, if Iran conflict remains unresolved, then the energy and feedstock prices will be volatile and trade flows will be disrupted. Demand will also be unpredictable. This will add pressure to the industry. As for Megachem our business the close correlation between our business and the overall economy. If the economy condition deteriorates, it will dampen our growth outlook. So in short, let me just summarize that. Firstly, we have the trade tension which has not eased. In fact, new tariff has been imposed in the last few months. The situation in Iran has not been resolved. So I think the group outlook for the second half remains fragile. So how should we respond? In response, we will have to diversify our supply sources to ensure continuity in supply to our customers as well as to deepen our market coverage in growth markets such as in Asia. In addition, we will position ourselves within the specialty chemical space, which gives us better margin stability. I think that ends my presentation. I thank you for your time and see you in the next briefing.