Samchem Holdings Berhad
A company that distributes a wide range of chemical that can be used in many industries, such as plastic manufacturing, personal care, pharmaceutical, etc. Their product offerings are closely related to our daily live, where most of the products are produced using raw material that Samchem distributes. Over the years, we can see chemical distribution has been a profitable business. And in the year of 2018, their revenue had surpassed RM1bil. You may try to surf their website to learn more about their history and product offerings.
While everything looks good, let us look deeper into their business model and try to understand why it is valued at PE 9 as some may say PE 9 is a good buy. First of all, distribution business is a low-margin business as there is not much value-added throughout the value chain. Just look at the net profit of it, it only generated RM 21mil of profit on the back of RM1bil revenue back in 2018. That means to say, margin is around 2% only.
Second, chemical distribution can hardly be a fast growth business but it can be a steady growth business. In the case of Samchem, revenue has been hovering around RM1bil since 2018. In distribution business, marketing and sales channel are important, where company needs to establish solid sales channel and provide tailored services to get recurring revenue, otherwise, customers tend to opt to cheaper alternatives or other suppliers since there is low level differentiation in the products. Samchem is rather good in this area, otherwise, we wouldn’t see their revenue surpassed RM1bil. It is worth noting that though, their margin has improved gradually. Using the latest figure, net profit margin has improved to 5.7%. It is explained due to better selling price despite the increase of cost of goods sold.
Third, distribution business is quite inventory intensive business where company needs to maintain a certain level of inventories for their operation. That said, cash is then converted into more inventories if the business is growing. More cash to buy inventories to grow their distribution business means lower cash to distribute dividend. More inventories kept also mean higher risk of inventories go obsolete or damaged. However, write off of inventory has not been an issue for Samchem, maybe due to the nature of chemical, where chemical is not easily damaged or obsolete, or management has their technical know-how to keep their inventory in good condition.
Above are the 3 main reasons of why Samchem is valued at PE 9 despite historical high quarter earnings based on my view.
Well of course, that doesn’t mean that this company isn’t worth taking a look, they have recently announced that they expand their business in Vietnam. They are growing gradually and steadily despite this tough operating environment due to covid-19. There’s no doubt with the execution of the management team, since they are all very experienced and led the company profitable despite all the challenges throughout the years.
It could be a re-rate for Samchem anytime soon.