MegaChem - SAC Capital 2023-08-21: Riding Out The Volatility

• MegaChem (SGX:5DS) is a global one-stop specialty chemical solutions provider with physical presence in 11 countries and suppliers across more than 30 countries around the world.
• With its humble provenance in Singapore in 1988, MegaChem quickly garnered success and expanded into Malaysia within a year of operation and Thailand and Indonesia within 5 years before listing on the Singapore Stock Exchange in 2003. Its associated company, Megachem (Thailand) Public Company Limited was also listed on the Stock Exchange of Thailand in 2017.
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• contract manufacturing.

Key Investment Highlights

Sticky relationships with customers allows for high visibility of orderbooks and sturdier margins.

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• Being appointed the sole distributor to multiple suppliers due to its strong presence in Asia further cements MegaChem’s positioning as the company of choice. Its global just-in-time delivery offering – a venture requiring precision – calls for superior inventory management and logistic capabilities coupled with a strong IT management system. Customers are also able to tap on MegaChem’s manufacturing capabilities, which boasts a proven track record with several multinationals on its orderbooks.
• The approval process for a customized product is lengthy and involves multiple regulatory hurdles. Once cleared, as long as a product is satisfactory, customers are generally unwilling to hop to a different supplier. This is further augmented by the price inelasticity of specialty chemical products, which only account for a small proportion of customers’ overall costs. The fragmentation of the specialty chemical industry reinforces such staticity, allowing for meaningful passing of costs to customers.
• We witness this during the pandemic years of FY20 and FY21, where MegaChem's gross profit margins remained stable at ~25% despite the rapid hikes of raw material costs on the back of unexpected supply chain disruptions. These factors converge and present themselves as longstanding client relationships, many over a decade, attesting to MegaChem’s success and value add in the supply chain.
• Despite the lackluster performance in 1H23, MegaChem is owing to faltering business confidence externally rather than a loss of clientele as we tread through economic uncertainties. This weakness is short-term and should dissipate as the business cycle inflects. Having a list of long-term clients allows for richer and more predictable orderbooks, especially with their needs staggered.

Well-diversified revenue streams offer resilience.

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Lim Qiuni Nicole SAC Capital Research | Matthias Chan SAC Capital | https://www.saccapital.com.sg/ 2023-08-21 SGinvestors.io

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