SAMCHEM (5147): A piece of rock? A gem? A gem of the old rocks?

Hi Readers,

Good evening and I hope that all of you had a great weekend with your family. There were asks on SAMCHEM (5147) recently on whether it can be considered as a growth stock for long term investing.  There were concerns on its debt level too despite breaking the RM1 bil revenue mark. Is Samchem a piece of rock or a piece of hidden gem? A recap of what I shared previously on what it meant by sustainable growth stock: one that has constant increase in sales growth outpacing profit growth, one that continues to re-invest its earnings. Such stocks will eventually perform better than the unsustainable growth stocks.

Samchem Holdings Bhd is Malaysia based chemical distributor firm. The company and its subsidiaries operates in two segments namely, Chemical distribution and blending which comprises of distribution of polyurethane (PU), intermediate, specialty chemicals and blending of customized solvents and Audio video and ICT distribution segment, which deals in Retail sale of audio video and trading and distribution of information and communication technology (ITC) system. Most of its revenue is earned from chemical distribution and blending segment from Malaysian market, whereas remaining through Vietnam, Singapore, and Indonesian market.

Let's dig into its financial performance for recent years and I have put up the quick facts in the images below. As shown in Image 1 below, 2016 and 2017 was a good year for Samchem and the share price moved up gradually from $0.40 cents to high of $1.27 by end of 2017/Jan'18. Thereafter, the share price started moving downwards until cum to date. Further drilling into its financial reports yielded a situation of smaller profit margins at the back of growing revenue, and negative cash flow in 2017 and 2018. That explained the decline in its share price. 

Image 1: Samchem's financials extracted from klse.i3investor web page

Let's drill deeper into its financial performance and I have put up a summary of the findings which includes its revenue growth, profit growth and also its debt as shown in the images below. Image 2 showing the ratios and margins extracted from Wall Street Journal and also the cum to date (ctd) consolidated statement of cash flow from its recent Q2'19 QR. Additionally, I have also computed the recent years revenue, profits and cash flow performance.

Image 2: Samchem's ratios and margins and snipshot of consolidated statement of cash flow from Q2'19 QR

Looking at the summary above, the revenue for Samchem is growing faster than its profit growth. Malaysia, Vietnam and Indonesia segment growth is impressive and less significant from Singapore. It is also noted that 2017 and 2018 recorded negative cash flow as mentioned earlier and that explained the decline of its share price driven by its financial performance. However, based on latest Q2'19 QR, there is also signs that its cash flow is starting to turn positive. Hence, it will be interesting to observe further its upcoming QR. If the company can continue to maintain positive cash flow, there is evidence that we may see Samchem's share price to start moving together with its improved performance.

Using the ratios and margins extracted from Wall Street Journal web page, it is also noted that its total debt to equity ratio is on the high side at 157.79% while long term debt to equity is at 6.03% (highlighted in red box). What it meant here is that Samchem has high short term debt instead of long term debt. Long term debt is crucial as it is affected by changes on interest rates. On the other hand, short term debt can be a problem when it comes to liquidity. The difference between long term debt and short term debt would be the timing itself. Long term debt has repayment duration of more than a year. 

To determine whether will there be a problem of liquidity, we can look at its working capital ratio or commonly known as current ratio - the ratio of current assets to current liabilities. Current assets include cash, inventory and accounts receivable. Current liabilities include accounts payable and short-term debt. A current ratio greater than 1.0 may indicate adequate liquidity, but a ratio less than 1.0 usually does not. Vice versa, a current ratio that is too high may indicate a problem with its current assets which requires management attention; normally its either inventories or trade receivables. With that, I have calculated the current ratio for Samchem for the last two years until its recent quarter performance and its above 1.0 which indicates sufficient liquidity as shown in Image 3 below. Additionally, I did a quick comparison with one of its peer, Luxchem and Luxchem has current ratio of more than 2.2 which is at higher risk compared to Samchem. 

Image 3: Samchem's current ratio based on 2018 Annual Report and Q2'19 QR

As long as the management continues to do its due diligence in managing its performance and coupled with fiscal policy that supports mega projects in Vietnam, Malaysia and Indonesia, there is a chance for Samchem to further strengthens its position as the billion ringgit revenue company.

Technically, Samchem share price is currently trading sideway between the range of $0.55 to $0.61 cents for the last few months as shown in Image 4 below. There is also a possibility that Samchem price action may form a rounding bottom if the management can continue to deliver a better financial performance at the back of positive fiscal policies in Malaysia, Vietnam and Indonesia.

Image 4: Samchem's price actions and possible rounding bottom

Looking at both the fundamentals and technicality of Samchem, I would say Samchem value increases (fundamentals) while the share price is declining; a gem of the old rocks. Hence, there are two possible trade setups that can be considered:

1. Long term positions:
• Initiate the first position at $0.58 +/- 3%
• Add positions if upcoming quarter showing positive developments on its cash flow while maintaining revenue growth
• Exit according to your own rate of returns or using the levels above as a guide
• Remarks: If the next two QRs showing that revenue starting to decline and cash flow worsens, one should consider to exit the position. Vice versa, one can continue to hold and ride its recovery if the upcoming QRs showing positive progress. 
2. Short term positions:
• Entry: Breakout above $0.61 cents or reversal at $0.525 cents
• Exit: According to your own rate of returns or using the levels above as a guide
• Stop loss: If share price closes below $0.525 cents
• Remarks: Alternatively, one can also wait for its upcoming QR to determine the entry positions using risk reward ratio. Do take note that Samchem has 272 million shares only and selling can be a challenge. 

Good luck and all the best!!!

Disclosure: The information above is for sharing purposes without any understanding of investment targets and needs of readers. References to the price movements is informational based on my analysis and data obtained from sources believed to be reliable at the point of writing. Please do your own due diligence as this article is not a recommendation to buy/sell.