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Sunday, April 1, 2007

HEXZA - Old Article #3

Some more interesting information about HEXZA's business. My quick take is:
1. Company has improved margins before when raw material cost increases (but this is never guaranteed for the future, although a good sign - can't read too much from 1 article).
2. The cash hoard has given them flexibility to expand their business with even better margins than in the past, further adding shareholder value.
3. They are market leaders in their own niche markets (60% ethanol market share, 30% resins market share in Sarawak).
4. Never missed a single dividend since IPO - that's impressive given that it has been listed since 1987, nearly 20 years!
5. In late 2005, SBB called TP of $0.68 - perhaps that explains why $0.67-$0.68 is an important resistance, as seen in the charts. Of course, HEXZA earnings have increased by another impressive 42% since then.

Sounds like a sound, long-term fundamental business isn't it? ... so, it's up to you dear readers to promote HEXZA more :-) Don't forget to buy more on weakness, and sell some at market tops, as it will take a while before the price shoot upwards ...


Corporate: Pricier raw materials don't stop Hexza
By Nadia S Hassan
October 18, 2005

Despite rising raw material costs and increased competition, Main Board-listed chemical company Hexza Corp Bhd still managed to post an impressive net profit growth for the first half of its financial year ending Jan 31, 2006 (FY2006). Although revenue has remained fairly stable, net profit for those six months increased by 90.2% compared with last year's. And the news gets better. Hexza is expected to perform even better in the second half of FY2006 compared with the previous corresponding financial period, according to its chairman, Datuk Dr Foong Weng Sum. All this indicates that margins are improving at Hexza, according to Ng Jun Sheng, an analyst with SBB Securities, which Foong confirms in an e-mail interview with The Edge. "For the first half of FY2006, profit before tax [PBT] margins increased to 13.7% from 8.4% in the first half of FY2005, which shows an improvement in operating efficiencies and economies of scale," says Ng This is an admirable feat considering that the price of primary raw materials used by Hexza, which include methanol, urea and molasses, has doubled compared with last year, according to analysts. This is mostly brought on by high demand from China and steadily rising oil prices. However, even with margins improving, Foong admits that it has been a challenging time for the company. "Raw material costs have risen and margins still remain under pressure, but we try to minimise this by improving operational efficiencies and yields," Foong says. However, ensuring further operational efficiencies is not the only thing Hexza is doing to secure growth. "Hexza has plans for expansion of all its core businessesformaldehyde-based resins as well as ethanol [ethyl alcohol] — some of which are in an advanced stage of implementation. The financial impact of these expansions should be accretive in the next financial year, (Seng: This refers to FYE 2007.) " Foong says. The company has already invested some RM9 million in capital expenditure to increase the capacity of its factories by early FY2006, as its Ipoh plants are already running at full capacity. With the expansion, Hexza expects output to increase by another 30% to 40%. Hexza also has factories in Port Klang and Sarawak. While its plants in Ipoh deal with the manufacturing of ethanol, its plants in Port Klang and Sarawak are involved in the manufacture and sale of formaldehyde and formaldehyde-based adhesives and resins for timber-related industries. To fund this expansion, Hexza has had to dip into its cash reserves. Even so, the company still holds about RM9 million in cash and cash equivalents and has hardly any borrowings, according to Foong. All of this should ensure that going forward, Hexza's margins should remain stable, says Ng. He adds that Hexza's pricing flexibility and product excellence would also help to sustain margins. According to a report by SBB's Ng dated April 12, Hexza is one of the largest local ethanol product manufacturers with a market share of around 60%. It commands about 30% market share in the adhesive resins market in Sarawak. Yet Hexza's public profile remains decidedly low key despite its good results and position as market leader. However, Foong says this does not mean that the company has not been active behind the scenes. "Hexza's core businesses are in very competitive sectors. And we are planning and working towards gaining greater market share for these core areas. But as to how much more only time will tell," says Foong. According to Ng, Hexza has a history of making prudent capital investments. "The group has invested about RM9 million over the last two years upgrading its R&D [research and development] and machinery in order to meet the high and stringent emission standards of overseas buyers." "Hexza has also signed an agreement with Orica Australia Pty Ltd, a leading multinational adhesives and resins manufacturer, for technology licensing involving the manufacture and application of low-emission resins in the wood adhesives and resins applications," says Ng. Hexza's share price has been hovering around the 47-sen mark over the past year. Its highest in 52 weeks was 50.5 sen on June 22 this year and its lowest was 44 sen (May 30). Ng has put a "long-term buy" call on the stock, with a 12-month target price of 68 sen. (Seng: No wonder there is strong selling pressure at $0.67-$0.68). There is also potential for dividend payments to increase. "Hexza has never missed an annual dividend since its IPO [initial public offering]. The company plans to declare a higher dividend with each passing year, although the increase will be at a prudent and measured pace," says Foong. Hexza's most recent dividend payment was 2.5% less tax. The company's net profit and revenue have also been growing steadily over the past three years. In FY2003, Hexza made RM3.7 million in net profit on RM97.8 million in revenue. For FY2004, revenue jumped to RM116.8 million, while net profit increased to RM4.8 million. Net profit then almost doubled in FY2005 to RM8.2 million while revenue increased to RM128.5 million.



can u post your weekly portfolio update. heard u hav 70 over stocks in your portfolio. hope its not too difficult. looking forward to see your portfolio. :)

Seng said...

Hi totomaster,

Sorry for the late reply - just saw this for the first time this morning.

To be honest, I prefer to keep a low profile. It's also potentially confusing to new investors to see a long list of stocks. It would be dangerous if they try to emulate me without knowing the overall investment plan for the stock and the reasons for owning/disposing the stock. I'm not a pure value investor (like Graham or Buffett), although I started off as being one and I find it useful to regularly read their writings. I am also in the process of experimenting, and I believe, like Jesse Livermore, that the best way to test one's belief is to put money on the table (Livermore has a very different style from Buffett). Putting up that list will invite too many questions and comments that would detract me from doing what I love doing best, which is to invest.

However, I intend to do write-ups on more stocks in future, as well as more book reviews, besides other related matters to stock investing. Hopefully, I'll be able to find the time to do so.


kent said...

Hi Seng,

A few weeks ago star newspaper published an article that a Malaysian Company with the Perak State Government has patented a procedure to make ethanol from Nipah Palm. They apparently have commenced construction of the production plants and are aiming for a target production of 8 to 9 billion litres of ethanol in 2009.
Surely this is bearish for Hexza?

What is your analysis?