HEXZA - An Updated Analysis

Since my last posting on HEXZA yesterday morning, "grahamsmun" has made some insightful comments on HEXZA raw material costs and HEXZA's share investments. It has led me to rethink my earlier (and lazy) approach to valuing HEXZA. I have decided to do a proper job, and share the updated results with you.

Raw material costs for Ethanol Division (Chemical Industries)
In one of HEXZA's annual reports, I learned that the main raw material cost used in the production of ethanol by HEXZA is molasses. For those of you who don't know what is that, molasses according to Wikipedia is a thick syrup by-product from the processing of sugarcane (or sugar beet) into sugar. As such it doesn't seem unreasonable to expect molasses price trends to follow sugar prices trends. I managed to find a nice long-term graph of sugar prices which could be worthwhile to take a look:


Quick comments:
1. Note the exponential rise in sugar prices from mid 2005 to mid 2006.
2. According to the Chairman's Statement in 2005 Annual Report, molasses price skyrocketed from Dec 2004 to April 2005. It affected HEXZA since local production of molasses are clearly insufficent, and they needed to be imported from overseas. This is consistent with the above chart where in Dec 2004 to Apr 2005, sugar prices has just came out from a bottom at 2003. The reason given was due to the severe draught in India and Thailand. India - a usual exporter - became importer. The Chairman expected the high prices to remain until the next harvest season in Dec 2005. This is consistent with the above chart where prices continue to escallate sharply (due to limited global supply) and peaking at the start of 2006, and then fall as the next harvest comes in.
3. More interestingly, in 2007, sugar prices seems relatively stable, and a slight drop towards the end.
4. Whilst HEXZA might actually pay different prices for molasses, the sugar price chart above suggests that if the trends are similar, then, we can perhaps expect HEXZA raw material cost to come down over the near term. I suspect there should be some time-lag effects, although at this stage, I am only speculating that the period might be say over the next 1-6 months?.
5. But there is no doubt that there is a clear secular / cyclical pattern to sugar prices, when looked from a long-term perspective. I expect this to apply to both HEXZA and its competitors that uses molasses as the main raw material.

Raw material costs for Resins (timber) Division (Norsechem and Hexzachem)
The main raw material for Resins Division are methanol, urea, phenol and melamine. According to a past Annual Report, the prices follow Crude Oil and Liquified Natural Gas. Fortunately, I've also managed to find a fairly long-term graph of light crude oil (Nymex). Again, the actual prices paid by HEXZA will be different, but hopefully, the price trends will be a close enough approximation.


Quick comments:
1. Note the escallating crude oil prices since the bottom at end 2001, which steadily rise to a peak in mid 2006, before declining towards the end of 2006.
2. What I find most interesting is that during this long period of escallating raw material costs, HEXZA bottom line actually grow over the same period. To me, this is a good sign since it shows that the company knows and have proven themselves to know how to manage escallating raw material costs over a fairly long period.
3. In 2007, crude oil prices has risen again. It is unclear if there is a time-lag in HEXZA's actual raw material costs. Certainly, the Resin Division and the Ethanol Division are 2 different and separate processes. It is possible that maybe there isn't significant time-lags - perhaps more knowledgeable readers can comment further.
4. Nevertheless, I take some comfort that there seems to be diversification benefits - whilst crude oil prices have increased from the start of 2007, sugar prices on the other hand has came down.
5. At this stage, my own personal conclusion (based on the little that I know so far) is that maybe, the raw material cost increase reported in the latest earnings report is a temporary event (i.e. assuming earnings to fall by 30% permanently might be a bit drastic). More likely, HEXZA management should be successful in controlling its raw material costs, as they've demonstrated over the last 4-5 years at the very least.
6. As usual, more knowledgeable readers are welcome to correct me. :-)

Other comments on raw material costs
1. As stated in one of the annual report, "most of our raw materials are imported".
2. It seems HEXZA does not have any outstanding foreign currency forward contracts (none disclosed in latest earnings report and annual report).
3. Thereby, an appreciating RM can be reasonably expected to reduce the cost of its imports, and vice versa.

Investment in Quoted Securities / Other Investments
Grahamsmun brought to my attention that HEXZA actually hold listed stocks in its portfolio. Thinking about what Grahamsmun said, and reflecting on the balance sheet further, I note that I have been extremely conservative in my calculation of P/E and Liquidation Price in the past. In both cases, I have assumed a nil value, when they are clearly not nil. (I'm sure even if I ask HEXZA very nicely to part with their quoted stocks, I believe they are unlikely to give it to me for free :-) ). So, there's clearly value there - the only question is how much? It's clear that we need to study Note 16.




Note 16


Quick comments:
1. The book value basis is "at cost".
2. The book value of listed shares (including warrant, etc.), less allowance for dimunition in value is $12.3M.
3. The market value of the same listed shares is $12.3M also, i.e. there doesn't seem to be a significant unrealized gain at 31/1/2006. (This is not too surprising, as the bull run only started later in 2006).
4. There is unquoted shares at $3.9M.
5. Note all these are out-dated values at 31/1/2006. For updated values, we need to check the quarterly earnings report.
6. In that report, at 31/3/2007, the total investment at cost is $14.0M. Total investments at market value is $18.5M. Not surprisingly, there is unrealized gain of $4.5M (KLSE has been good recently).
7. I suspect that if one is forced to liquidate its shares today, probably one could easily fetch 95% of that stated market value of the quoted shares. However, the stock market is volatile, and much depends on the timing of liquidation. There is no guarantee that in future, the market value of those stocks will rise (even though we might expect the market as a whole to rise). Since we simply don't know exactly what stocks HEXZA hold, we have to be prudent and assume a safety margin. For my liquidation valuation, I have assumed a prudent factor of 75%, and yes, it is debateable, and yes, your factor can be validly different than mine.

Updated Liquidation Valuation


Quick comments:
1. Liquidation Price 1 is the old liquidation price that I previously reported here.
2. Liquidation Price 2 is adding 75% of the quoted shares at Market Value, with other % unchanged. (see original posting). At 31/3/2007, this comes out at $13.9M (= 75% x $18.5M). Based on this revise basis, the latest liquidation value is $0.76.
3. Looking at liquidation price 2, it is interesting to note the trend over time. Back in FY 2001, when the company quoted shares is only $2.9M, both Liquidation prices are close to one another. Over time, the gap has steadily increased, and today, there is actually a $0.11 difference. This quite a significant difference, even though I have assumed a 75% factor.
4. Note that in my liquidation valuation, I am still assuming nil value in HEXZA's other assets as I am lazy, and it is a conservative valuation.
5. It is interesting that at last Friday, HEXZA happened to trade at $0.77, which is just slightly higher than its liquidation valuation. Had I done a proper job earlier, I would have considered grabbing as much HEXZA shares as possible when it was selling at well below $0.70 ... as it was clearly trading below its liquidation valuation ... oh well ...

Scenario Testing
It is a fairly common analytical technique where when there is uncertainty about one or two variables, that the analysis considers the possible ranges of the variables in order to get a feel for the impact on the final result. Here, I foresee 2 possible variables - the first is on earnings (whether earnings will stay the same, or fall by say 30% forever due to the recent rise in raw material costs), and the second is on whether the business should be valued including / excluding 75% quoted shares. For completeness, I have also considered the superficial P/E (where one ignores Net Cash completely).



Quick comments

1. My base case is actually Scenario 3, where I've taken out Net Cash (= Cash + equivalents - Total Borrowings) as well as 75% of shares from the current price. At current price of $0.76, it suggest that the business is available for sale at $0.37 = $0.76 - $0.27 - $0.11. The EPS for the Trailing 12 Months (TTM, which I've approximated, assuming uniform distribution of earnings in Q1/07 and taking a third of that) is $0.11. This suggests that at last Friday's closing price, HEXZA is still trading at a fairly undemanding valuation of 3.5 times.

2. It is possible that some of us might still be a bit nervous that the raw material costs could stay permanently high, despite the charts that I've shown and despite the appreciating RM. It's probably worthwhile to consider (for peace of mind) what would happen if HEXZA's earnings were to stay 30% below forever. This is Scenario 6, and it suggests that at current prices, HEXA P/E would be 5 times. Still fairly undemanding (now I can sleep ...).

3. A novice fundamental investor might only consider the market price and the EPS. This is Scenario 1, and the implied P/E is 6.9. Still undemanding. In the worse case, if EPS drops 30%, this is Scenario 4, and the P/E is about 10.

4. My personal conclusion is that HEXZA is really trading at a fairly undemanding P/E, even at last Friday's closing price of $0.76.

Updated Intrinsic Value
As I mentioned above, I believe that my base Scenario should be Scenario 3. It is clear that this is different from what I had written earlier, due to the new information (new to me) and updates that I mentioned above. Under this scenario, a natural question might be what could be an appropriate Intrinsic Value for HEXZA?

Again, this would boil down to what should be the appropriate P/E for HEXZA. Personally, my discount rate could be different from yours, but if I demand a minimum return of say 15% p.a., then, if HEXZA earnings has nil growth, then, my P/E will be 1/15% = 6.7 times. This I think is fairly conservative and prudent. So, my own intrinsic value is $1.14 = 6.7 x 0.11 + 0.27 (cash) + 0.11 (75% share). This is higher than SBB's Intrinsic Value of $1, both of which are higher than current price.

If you don't know what Intrinsic Value is, then, basically it's just what I think the company is worth and what I think a rational businessman would consider paying, if he wants to buy HEXZA in its entirity, without changing anything at all (including not changing its management). If you want to know more about Intrinsic Value, I recommend you to read Berkshire's Annual Reports. There's no single right answer to Intrinsic Value. But as Buffett likes to say "It's better to be approximately right than precisely wrong". This is the spirit as to how I estimate HEXZA's Intrinsic Value.

Still, there might be other shareholders who might not be as demanding as me, in terms of applying a P/E of 6.7. They might use a higher P/E, say 7 to 10. If so, this will naturally raise their own estimate of HEXZA Intrinsic Value.

However, you might validly think that raw material prices will permanently decrease HEXZA earnings by 30%. In that case, the Intrinsic Value might be $0.90 = 6.7 x 0.077 + 0.27 + 0.11. In which case, it would be slightly lower than SBB Intrinsic Value. So, maybe SBB's Intrinsic Value of $1 might not be too bad after all for prudent investors.

Conclusion
For the readers of this blog, I encourage you to form your own opinion on what is HEXZA's Intrinsic Value, based on the data that I have provided here and elsewhere.
For me, I believe that HEXZA is still trading at a fairly undemanding P/E, despite last Friday's price increase. I believe there is more potential upside. However, it is possible that the market might not agree with me. That is always a risk. However, if you believe Buffett, that in the long run, the market is a weighing machine, then, there is only one conclusion. (buy)

Disclaimer
You already know I don't work for HEXZA.
You also know I own HEXZA shares, although in a moment of temporary insanity, I sold some of my holdings earlier to bring down my average cost ...
You know constructive comments are welcomed, especially when they are different from my own.
And you know my usual Disclaimer - "as usual, use your own judgement and invest (i.e. buy, hold, sell) at your own risk".
Happy investing!

HEXZA News

I must admit I didn't monitor the stock market yesterday afternoon - I was too occupied writing the article on OSKVI besides other things. So, my eyes nearly popped out when I saw HEXZA price after market closing - HEXZA had made a nice price gain, closing at $0.76, up 7.5 sen or 10.9%. That's decent for a stock that is normally quiet with relatively lowish volume traded ... :-)

Naturally, I was curious as to why. Then today, I happened to visit Moola's blog, and noted his posting on HEXZA this morning. Reading it, there was a Star Article published this morning with Buy Call for HEXZA. Aha ... the light bulb lits ...

So, here's my usual highlighting of the full article (courtesy of biznewsdb.com) with my comments. As usual, use your own judgement, and invest at your own risk.

___________


Hexza at one-month high
Updated : 12-05-2007
Media : The Star
Story By : YVONNE TAN via www.biznewsdb.com

PETALING JAYA: Hexza Corp Bhd shares hit a one-month high of 77 sen yesterday after a local brokerage initiated a "buy" call [1] on the counter, on prospects of the company's profits escalating [2] and a higher dividend [3].

In a report released yesterday, SBB Securities Sdn Bhd senior analyst Ng Jun Sheng said he regarded Hexza as a "hidden gem" [4], given its stable growth and abundant net cash.

The adhesive resins division, which is one of Hexza's two main divisions, is targeted at timber-related industries.

Its ethanol division is the largest ethanol products manufacturer in the country, with more than 60% market share.

For the financial year ended Jan 31, Hexza's turnover jumped 22.7% to RM159.6mil, thanks to expanded production capacity in its ethanol division and rising demand for adhesive resins.

Despite higher raw material prices, the company's bottomline expanded 42.2% to RM14.8mil, spurred by earnings before interest and tax margins of 11.7% on efficiency gains and economies of scale¨ Ng said.

He is targeting a compounded annual growth rate (CAGR) of 21.8% in net earnings from 2006 to 2008 [5] on higher sales from both divisions, buoyed by increased production capacity and recovery in timber-related sectors.

Earnings before interest and tax margins were likely to improve to above 11%, Ng said.

This would be driven mainly by economies of scale and production efficiency, selling price adjustments, stringent cost control and stabilising raw material prices [6], he added.

Ng said Hexza's competitive advantage was its technology and innovativeness.

Its focus on using material science to help customers attain their goals has established Hexza as one of the top leaders in the ethanol and adhesive resins business.

Going forward, Hexza is expected to continue to invest in state-of-the-art equipment to stay ahead of its competitors,¨ he added.

Ng said shareholders could look forward to higher dividends, given Hexza's strong net cash of RM35mil (or 27.2 sen per share), healthy net cashflow of RM10mil to RM13mil every year and low capital expenditure requirements.

Ng does not discount the possibility of Hexza being taken private in future if its share price does not reflect its true potential¨, and its strong intrinsic value.

To this, however, a senior management staff told StarBiz: "Not in the near-term¨,[7] but added that the company's future remained bright.

Hexza shares closed 7.5 sen higher at 76 sen yesterday.

Ng values the company at RM1, ascribing a price-earnings ratio of 8.3 times [8] on earnings per share for the year ending June 30, 2008 of 12 sen.

________

My quick comments:

[1] Newspaper journalists tend to sensationalize. Technically, SBB did not just "initiated" but has made Buy Calls on HEXZA in the past. It is a shame the Star editors didn't pick this up. Nevertheless, it is comforting to note SBB still thinks it is a Buy, despite the recent price increases.

[2] Just bear in mind that the last 2 month earnings for "Q5/07" is proportionately worse, not better. Something to watch out for for next quarter earnings report.

[3] It is important to mention that the prospect of higher dividends is just that - a prospect. There are no guarantees, and they are probably just odds at this stage. Nevertheless, I take comfort that HEXZA has a nice cash hoard, dividend increase history in last 3 years, good earnings and cashflow well in excess of what's need to pay say a 50% dividend increase (despite the recent 2 month drop in earnings). So, I lean towards SBB here - the odds are good, despite the proportionately worse earnings (unless there is continued drastic drop, which I'm not expecting).

[4] As this will be my 7th posting on HEXZA, I guess it should not be "hidden" to regular visitors here ... :-)

[5] This is a rather strange period, given that HEXZA has already completed 2007 FY (ending 31 Jan, although this is now changed to 30 June). During FY 2006-2007 (which I define as starting from 1 Feb 2005 - 31 Jan 2007), HEXZA earnings already grew nearly 80%, or 21.6% p.a. if compound over 3 year period. If so, then, it implies that HEXZA earnings will not grow in FY 2008, which is possible. However, it is also possible that my reading of the article could be wrong. Suggest better to continue to monitor HEXZA earnings.

[6] Stabilizing raw material prices ... hmmnn ... perhaps more knowledgeable readers on HEXZA's business model may comment more intelligently here. Superficially, it seems to contradict the most recent earnings report, although the earnings report is only up-to-date to 31 March.

[7] I tend to lean towards with HEXZA management, that they are unlikely to privatise in the near term, especially given the recent price increase.

[8] It looks like both SBB and myself agreed that HEXZA is probably still under-valued at $0.765, although the degree (and margin of safety) has clearly lessened when I first made the call at $0.65-$0.67. Technically, yesterday was a bullish signal, with support zones at $0.72-$0.74, and second support at $0.70. Previous 12m high of $0.78-$0.80 might be a resistance, but if it breaks through that, then, $0.85 might be the next resistance.

Disclaimer: As usual, use your own judgement and invest at your own risk. Remember that chart signals can potentially change very quickly (depending on your trading time-frames), so, trade at your own risk too.

HEXZA - Financial Results Update

HEXZA posted its "quarterly" financial results last night. It might be surprising since it has just posted its previous earnings results just over a month ago (27 Mar). The reason is due to the change in the company's financial year-end (from 31 January to 30 June) - the company has therefore announced the results for 31 March 07 (14 months), and there should be another one for 30 June 2007 to complete its new financial year end. For convenience, I have labelled the 2 month period from 1 Feb-31Mar as "Q5/07", but note that this is only 2/3rd of a traditional quarter.

QUARTERLY EARNINGS

Quick comments:

1. Q1/07 relates to the 3 month period from 1 Feb 06-30 Apr 06. We can compare Q5/07 with 2/3rds of Q1/07.

2. Revenue for Q5/07 is proportionately better than Q1/07, despite Q1/07 being a traditionally slower quarter.

3. PBT and PAT however is proportionately worse.

4. In the notes, the company attributed the reduced earnings to a rise in raw material costs. Whilst the company does not try to hide and instead draws shareholder's attention to the proportionately worse earnings results, they have also not elaborated further. My feeling is that two months may be too short a period to judge, as final product price rises & fall tend to lag costs rise & fall.

BALANCE SHEET

Quick Comments:

1. Total borrowings continue to inch downwards - ok.

2. Long term debt continues to inch downwards - ok, since long term debts typically carries higher finance costs, and I take comfort that the traditional company strength and culture is still intact.

3. Inventory and Receivables - ok.

4. Cash inch upwards - good.

5. Net Assets continue to grow albeit slowly, from $1.26 to $1.27.

6. Liquidation price (same basis as before) continues to grow, from $0.63 to $0.65. (Note that number of shares outstanding has grown slightly due to ESOS).

7. Balance sheet is still strong overall and improving slightly.

REVISED P/E AND MARGIN OF SAFETY

If we assume Q1/07 revenue and earnings are uniformly distributed over the 3 month period (even though we know they are not), then, the TTM PAT = $14.2M, representing a slight reduction from $14.8M previously. At yesterday's closing price of $0.69, the company is capitalized at $89.2M. Net cash is $34.9M. The business is effectively capitalized at $89.2 - $34.9 = $54.3M. This gives a net of cash P/E of 3.7, which is still undemanding. With NTA/share at $1.27, and liquidation price of $0.65, current price of $0.69 still affords quite a significant amount of margin of safety.

TECHNICAL

(courtesy of tradesignum.com)

Since my first posting on HEXZA (Mar 28), the stock price has generally advanced up to Apr 10 with a "doji". Note the long upper shadow and the relatively high volume (which is slightly different from past false dojis). The next day (coincided with the irrationally bearish 10 April news article on Pioneer, Nipah Palm and Ethanol - see my 30 April posting) provided confirmation that the bulls have lost and the price starts its downward trend up to Apr 19. On Apr 20, the green candle provided confirmation that the bears has lost. Apr 27 - red candle, lower volume - potential reversal. Apr 30 - undecided, but May 3 confirmed downtrend. May 4 - slowing down, increased volume. Downtrend is still possible next week. I will be looking to accumulate on further weakness, after trading some of my HEXZA holdings earlier this week. However, I don't expect to make significant gains from trading since it's quite clear that there are more exciting "trading stocks" around that affords much higher potential gains. For me, it is largely to gain more trading experience, as well as earning extra interest whilst waiting for the catalyst to emerge (if any), not to mention always having a position in a fundamentally sound stock.

DIRECTOR UPDATES
In addition to his earlier filing on 7 March, the M.D. has filed his intention to deal in shares during the closed period again on 6 April. So far no activity has been reported to Bursa. It pays to continue to watch the M.D.'s movements closely.

CONCLUSION
Whilst the proportionately lower Q5/07 earnings and the rise in raw material costs is something to watch out for, it is too early to make a definitive conclusion that future earnings will be permanently impaired. Balance sheet is still strong and solid, the company still continue to manage its business well, so, at this stage, I would say the results are still well within reasonable parameters. At $0.69, I believe it is still trading at a rather undemanding valuation.

HEXZA, Ethanol, Nipah Palm

Reader "kent" sent an interesting comment yesterday that:

"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?"

Actually, I'm not so sure if it should rationally be bearish, although interestingly, the share price did drop from $0.695 on Apr 10, to $0.655 on Apr 19, before recovering. I found an article from Star Online dated 10 April, which might shed more light. As usual, I will highlight a few key words/phrases with my comments below.

_____________


Tuesday April 10, 2007
Malaysian company says bio-fuel from nipah can help halt global warming
KUALA LUMPUR: A Malaysian government-backed company claimed Tuesday it has found a new source of energy to replace fossil fuels - ethanol from nipah palm trees that it believes can help stop global warming.
Pioneer Bio Industries Corp. said it is building the world's first refinery to commercially produce ethanol from the short palm trees, found in equatorial countries, that could fuel everything from automobiles to power plants.
Pioneer says the nipah palm sap will be used in a patented process to make ethanol, which produces virtually none of the carbon emissions blamed for the climate-changing greenhouse effect and ozone depletion.
"This is a new energy source to save the world, to tackle global warming,'' Pioneer Chairman Badrul Shah Mohamad Noor told reporters.
The company envisions a fuel of the future that would be 85 percent nipah ethanol and 15 percent gasoline, he said, thereby greatly reducing dependence on fossil fuels.
With a production capacity of 100 million imperial gallons (450 million liters), the refinery in the northern state of Perak will go on stream by the end of 2008, Badrul Shah said. Pioneer plans to build 15 such refineries across Malaysia.
Badrul Shah said nipah ethanol is an better alternative to ethanol produced from palm trees, sugarcane, corn, cassava and other plants because ethanol from those sources eats into food production and raises their prices.
Nipah palm trees are not a food source and its sap can be drained every day without the need to harvest the plants.
"The plant will live for 50 years. We just have to collect its sap,'' he said.
He said Pioneer has received an order worth more than US$66 billion (euro50 billion) from one of the biggest trading companies in the world to buy its ethanol from 2009 to 2013.
Badrul Shah refused to identify the company, saying details would be announced at a later date.
The size of the order could not be independently confirmed.
The Malaysian government has given Pioneer the right to harvest nipah palm trees on 10,000 hectares (24,710 acres) of land in Perak.
That is enough to run 15 refineries for five years, and there are millions of hectares of nipah palm trees growing in the wild in the wetlands along the coast and on Borneo island that can produce enough fuel to "replace the entire fossil fuel needs of the world,'' Badrul Shah said.
Pioneer has taken an international patent on the process of producing ethanol from nipah palm tree, which was perfected over five years by 16 Malaysian scientists commissioned by Badrul Shah, a businessman with interests in construction and services.
Currently, ethanol accounts for only 2 percent of the total global fuel consumption.
Also, the demand for food-based ethanol has been blamed for deforestation as trees are being cut down for plantations. - AP


Quick Comments:
1. My impression from the above is that Pioneer's new product seems quite different than HEXZA's, even though both are "ethanol".
2. HEXZA's ethanol seems to be for non-biofuel uses (e.g. Kaoling wine, or food), whereas Pioneer's ethanol seem to be totally "biofuel based".
3. Apparently, Pioneer has already found a buyer for the years 2009-2013 in Europe. The demand for HEXZA's ethanol seems to be brought on more from China. So, the 2 target markets seems different to me.
4. From investor's perspective, it is more important to assess the impact on HEXZA's future earnings. To me, it is not clear if Pioneer will impact HEXZA's earnings over the next 6 years (2007 to 2013). I am inclined to dismiss it as "nil/negligible".
5. Also, HEXZA (at $0.715 closing last week) only trades at a P/E of 3.9. The margin of safety is still quite large (even in the present competitive market).
6. At this point in time, I think it is premature to be concerned about Pioneer. My advice would be to continue to monitor HEXZA's quarterly results.

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 businesses — formaldehyde-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.

HEXZA - Another old article #2

Another older article (Feb 2004). Gives an idea of their resins business which is used to manufacture particle boards, MDF and plywood. Given HEXZA's undemanding P/E, I would think that higher P/E companies, possibly competitors of MIECO and EVERGRN, may want to consider taking over this part of HEXZA's business to boost their earnings. E.g. MIECO trades at a P/E of 30, that if it acquires another coy with a P/E of say 10 with the same size, that's an immediate reduction of MIECO's P/E from 30 to 20, which will trigger a market re-rating. Anyway, that's just a speculation on my part.

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Hexzachem, Norsechem to use technology from Orica Australia
18 February, 2004
Adhesive and resins manufacturer Orica Australia Pty Ltd will transfer its technology in the manufacture and application of low-emission resins to Hexzachem Sarawak Sdn Bhd and Norsechem Resins Sdn Bhd.
Hexzachem and Norsechem, both subsidiaries of Hexza Corp Bhd, will use the technology to manufacture particle boards, medium density fibre boards and plywood panels.
Orica, Hexzachem and Norsechem signed a technology licensing agreement in Kuching last Thursday. The signatories were Orica's Adhesive and Resins General Manager Dr George Barnett, and Hexza Chairman Dr Fong Weng Sum and Chief Operating Officer Jorma Kalevi.
The agreement will pave the way for joint product development by Hexzachem and Norsechem, increase their product range, and enhance the quality of their existing products.
Fong said the agreement represented Hexza's continuous efforts to apply the latest resins technology and formulations to cater to the increasing demands of customers. Barnett said Orica's partnership with Hexza would enhance its presence and influence in this region.
More than 70% of Hexzachem and Norsechem products are exported to Japan, Europe, and the US, among other markets.
Adapted from "The Star", 18 February, 2004

HEXZA - An old article

I was browsing around some old news just now, and came across an old article about HEXZA (nearly 6 months ago) and thought it's worthwhile sharing here. It is quite a positive/balanced article, with both good and bad points, and in the interest of telling you the whole story, good and bad, I hereby present it to you ... The only surprise I had is that I didn't know SBB covered HEXZA before, and now that SBB is part of CIMB outfit, perhaps CIMB might cover HEXZA. If anyone knows and has a CIMB analyst report, I would greatly appreciate receiving a copy of the CIMB Analyst report, to compare it with my own personal analysis. I will not post it in its entirity, but I would be happy to summarize an extract to post here. Thanks.

It is also worth mentioning that SBB also expects higher dividend. They think it could be 3 sen, i.e. 50% increase. That seems consistent with last year's increase, although I won't rule out a special dividend in view of their superb results.

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Hexza does well despite challenges
Friday October 13, 2006
BY KEITH HIEW
PETALING JAYA: Malaysia's largest ethanol products manufacturer Hexza Corp Bhd has performed “commendably” despite rising materials costs and intense competition, and should be a target stock for investors, said research outfit SBB Securities.
The research house said due to external uncertainties, the brokerage was inclined to focus on companies with good management and valuations rather than on specific sectors, and singled out Hexza as an example of such a stock.
The company's earnings per share (EPS) of 6.1 sen for the first half ended July 31 alone was equivalent to 77% of the EPS for the year ended Jan 31.
Turnover for the second quarter ended July 31 improved 23.9% to RM41.8mil due to expanded capacity in its chemical division and increasing demand for the company's adhesive resins. Net earnings increased 9% to RM4.8mil.
SBB Securities said the company had performed well in spite of challenges like increasing costs and competition due to rising demand of raw materials such as methanol and molasses from China and high oil prices. Hexza's operating margins, it said, had improved to 11.5% for the year ended Jan 31 from 8.5% in 2005, attributed to higher sales and rising economies of scale.
The research house's senior analyst Ng Jun Sheng told StarBiz yesterday that SBB recommended Hexza in October 2004 when the stock was at 54 sen, but the share has not been active and its price has traded in the range of 42 sen to 64 sen in the past two years. (Seng: this would be an awesome trading range!)
Ng said: “We believe the underperformance of the stock could be due to the lack of media coverage and promotion by the investment community, the eagerness of the company's management to keep a low profile, a lack of investor focus on small-cap companies and maybe a high free float among shareholders.''
He added that SBB believes the company is “ripe” for a re-rating given the resurgence of interest in small-cap stocks, savvy management, undemanding valuations and anticipation of earnings improvement for the year ending Jan 31, 2007 due to lower raw material costs, efficiency gains and lower effective tax rates due to reinvestment allowance.
SBB Securities expects a higher dividend of 3 sen for the financial year ending Jan 31, 2007 from Hexza on the back of higher earnings and stronger net cash of RM25mil.
Another analyst (Seng: anyone knows who besides SBB/CIMB?), meanwhile, said Hexza's existing shareholders were also keen to increase their stakes in the company over the past two years as they themselves also recognise the company's value.
Hexza shares closed 6 sen higher, or 11.5%, to 58.5 sen yesterday.

HEXZA - Introduction and Quarterly Earnings Comments

INTRODUCTION & SUMMARY

HEXZA (Hexza Corporation Bhd) is primarily a manufacturer and seller of formaldehyde based adhesives and resins for timber related industries, ethyl alcohol, natural vinegar, cooler, liquified carbon dioxide and kaoling wine. It is a small-cap stock ($84M market cap at closing price $0.65), listed on the Main Board. The company has a financially strong balance sheet, with a net cash of $0.27, and growing. At $0.65, the business is available for only $0.38, or trading at a very undemanding P/E of 3.3 (net of cash), or 5.7 (inclusive of cash). 2007 (FYE 31 Jan) net earnings grew strongly from $0.081 to $0.115, or an impressive 42% growth. The company paid a small dividend last year. I am speculating that the company may increase dividends this year. On 7 Mar, 2007, the M.D. (Datuk Dr Foong Weng Sum) informed Bursa of its intention to deal in its shares (I am speculating that he intends to buy more, because of its good earnings results and possible increase in dividends). Despite being a fundamentally sound and under-valued small cap, Bursa eResearch does not cover the stock. The company released its quarterly earnings report last night, which was better than I expected. Fundamentally, my intrinsic value would be at least $1 to $1.50. But don't expect the stock to reach this price soon - unless more analysts follow the stock and a single institution/fund starts buying the stock in a signficant manner. In the last 6 months, the stock price has increased nicely from $0.50 to $0.65 (nearly 30% increase approx) Despite this, the stock still looks cheap. Future price catalysts may be upcoming M.D. disclosure of HEXZA transactions if any (possibly late March, or April), upcoming dividend announcement (usually end May/early June, although the pending change in company year end from 31 Jan to 30 June might delay this), and the next quarterly earnings. Downside risk seems limited - my personal liquidation value of this stock is around $0.64, and technically, there seems to be fairly decent support at $0.60.

(Newly completed ethanol plant with enhanced quality and capacity - source 2006 Annual Report).

QUARTERLY EARNINGS RESULTS

Some quick observations are:
1. Nice increase in revenues in last 3 quarters (over $40M per quarter) compared to same period last year. I suspect this is due to both higher prices as well as increased capacity.
2. Decent increase in gross and net of tax margins in 2007, vs 2006. I suspect despite the increase in raw materials this year, the company manages to pass on the higher costs in the form of increased prices, as well as controlling its costs. Tax rates not a significant factor.
3. 2007 bottom-line increased 42%, an impressive growth.

EARNINGS LAST 8 YEARS

My quick observations are:

1. Always profitable in last 8 years.
2. Still decent profitability in worst year (FYE2004, at 4.3% - i.e. fairly decent still).
3. Personal estimate of liquidation price of $0.64 is close to yesterday's closing of $0.65. The valuation basis assumes 100% cash, 80% receivables, 70% inventories, 50% Plant, Property Equipment as assets (and putting nil value on all the other assets - extremely conservative), and 100% of both current and non-current liabilities. In other words, despite the huge earnings, cashflow, etc. the market is valuing HEXZA close to its liquidation value, which, in my opinion is clearly irrational. To me, this is just one of many examples that Malaysia stock market is still inefficient.

BALANCE SHEET

Some quick comments:
1. Strong debt management and control. Nil debt in 2006, small debt in 2007. Company pared down debt in Q4/07 quickly, which I like since this is good for profits.
2. Nice net cash position. Nice growth in cash balance from $24M to $36M (Q4/07).
3. Nice working capital (=Net Current Asset Value). Nice to see it steadily growing.
4. Fairly steady Fixed Assets.
5. Inventories nice. (Q4/07 is lower).
6. Receivables okay (due to increased Revenue).

DIVIDEND HISTORY

Some quick comments:
1. HEXZA is traditionally a small dividend payor. (Net of tax Dividend Yield is only 2.2%).
2. Small dividend increase past 2 years.
3. I am speculating whether HEXZA will declare bigger dividends in 2007, in view of its excellent 2007 earnings results, nice cashflow, increasing cash hoard, and M.D.'s intention to deal in HEXZA securities recently. Current dividend cost is only $1.9M, whereas its cash balance has increased $12M and its PAT increased $15M. Financially, HEXZA can easily afford doubling its dividend this year ...

TOP SHAREHOLDINGS & DISTRIBUTION OF SHAREHOLDERS

Some quick observations:

1. No EPF presence - doesn't appear in the Top 30 list, but the Ministry of Finance does at #18.
2. Absence of major funds ownership - seems mostly individuals. (positive, since first fund move will be beneficial to price).

3. Significant insider ownership. Summit Holdings (#1) is owned by the Foong brothers. They own nearly $20M worth of shares in HEXZA. The M.D's pay is nearly $1M, i.e. he should be reasonably motivated by his HEXZA share performance.

4. Predominance of small investors - many holding less than 1,000 shares.

HISTORICAL PRICE CHART

Some quick observations:
1. Share price experienced nice growth over the last 6 months (although end Feb correction can be quite volatile due to small cap).
2. The long-term trend is an increase in prices (as indicated by the lower and increasing 200 day moving average - the correction is clearly irrational).
3. Fairly decent support at $0.60, but expected to grow with more investors knowing its true value. In the last correction (end Feb), the stock fell below $0.60 and quickly rebounded. In the smaller correction following that (early Mar), it rebounded above $0.60. The stock seems to have strong support at $0.60, below its liquidation price, but that may only be temporary. I expect as more investors are aware of its true intrinsic value, the support will rise over time.

INTRINSIC VALUE / TARGET PRICE

To me, HEXZA as a Main Board company should be valued at least 8 times earnings or higher. Trading at only 3.3 times net of cash is ridiculous. (E.g. Bigger companies should consider acquiring HEXZA since it would easily increase their earnings going forward). A P/E of 8 is not unreasonable, given that HEXZA strong earnings growth in the past, consistently profitable history, as well as its increased capacity. As such, I would put a fair value of HEXZA at $0.27 (cash) + 8 x 0.115 (2007 EPS) = $1.20 say, or say around $1 to $1.50. But don't expect the stock price to rise overnight - see Risks.

RISKS OF OWNING THIS STOCK

1. Perceived unexciting/slow/little price appreciation. This perception is actually incorrect, as the stock has appreciated nicely 6 months ago, from around $0.50 to $0.65, or nearly 30% gain. It's still a penny stock at $0.65.

2. Few/no analyst and institutional investors following / owning it, so, share price might not get a similar boost to followed stocks. Still, this is a risk worth taking, since there is little downside, with lots of potential upside should this come to fruition.

3. Continued low dividend yields. Management might continue to be conservative, and not increase dividends. The risk is lower, but should it happen, I would consider liquidating the stock, and put the funds to better uses elsewhere.

CONCLUSION

At $0.65, HEXZA is still very cheap from a fundamental perspective despite its decent price increase in last 6 months. I think it should be valued at at least $1, if not more. The problem clearly lies in the inefficient Malaysian stock market for small caps - the vast majority of ordinary investors probably aren't aware of the company's compelling valuations or its recent excellent earnings growth. Its prudent and conservative management, and low past dividends also contributed to this perception. There are some indications that this could change (e.g. increased dividends last 2 years, possible Director buying in March 2007), but this is far from certain. Investors preferring greater certainty (and possibly lower returns) are better off delaying purchase, e.g. until after the Director has reported his actions more clearly, or waiting for the actual dividend announcement (normally announced in May 2007). On the other hand, those with surplus cash might want to consider parking some of their cash in HEXZA now, as the downside risk seems low compared to the potential upside. If you have surplus cash, BUY some now and the rest on weakness.

Disclaimer: Today, I purchased more of this stock at $0.65-$0.67, just before the CI correction happened later in the morning, to bring my average cost to around $0.61.