Hextar Global Berhad (KLSE:HEXTAR): Balancing High Debt with a 28.22% ROE in the Agrochemical Sector

In the world of value investing, few metrics spark as much debate as Return on Equity (ROE). Hextar Global Berhad (KLSE:HEXTAR), a Malaysian agrochemical player, has recently reported a ROE of 28.22% as of July 2025, significantly outperforming the Chemicals industry average of 5.3%. However, this impressive figure comes with a caveat: the company's debt-to-equity ratio stands at 1.55, indicating a capital structure heavily reliant on borrowed funds. This article evaluates whether Hextar's elevated leverage is justified by its profitability and long-term growth prospects in the Malaysian agrochemical sector.

Financial Leverage and Debt Sustainability

Hextar's debt load is not trivial. As of March 2025, its total debt reached MYR 426.66 million, with a net cash outflow of MYR 387.86 million. Yet, the company's ability to service this debt appears robust. Its interest coverage ratio of 5.25 means EBIT (MYR 124.10 million) is more than five times its interest expenses, which we estimate at approximately MYR 23.64 million annually. This suggests the company can comfortably meet its interest obligations, even in a tightening credit environment.

The cost of debt remains a critical unknown, as the firm does not explicitly disclose its borrowing rates. However, Hextar Retail Bhd—a closely related entity—serves as a proxy. Its cost of debt in 2025 was 5.0078%, adjusted for a 79.92% tax rate. Assuming a similar rate for Hextar, the company's interest burden would be manageable, especially given its strong EBIT margins (14.59%) and free cash flow (MYR 80.41 million). The Debt/EBITDA ratio of 2.98 and Debt/Free Cash Flow ratio of 5.31 further indicate that the firm's cash flow is sufficient to cover its debt obligations, though it leaves little room for unexpected shocks.

Profitability and Growth Drivers

Hextar's ROE of 28.22% is among the highest in its sector, driven by a combination of aggressive debt financing and operational efficiency. Over the past five years, the company has grown earnings at an average annual rate of 14.2%, far outpacing the industry's negative growth. Its net profit margin of 6.6% and operating margin of 9.10% (as of July 2025) reflect disciplined cost control and pricing power in the agrochemical market.

The Malaysian agrochemical sector itself is a tailwind for Hextar's growth. Projected to expand at a 4.56% CAGR through 2030, the market is driven by rising demand for fertilizers and crop protection solutions. Government initiatives like the ARISE Plus Malaysia project and the Fertilizer Act underscore the sector's strategic importance in boosting agricultural productivity. Hextar's diversified portfolio—spanning fertilizers, specialty chemicals, and agricultural services—positions it to capitalize on these trends.

Risk Considerations

While Hextar's ROE is compelling, its high leverage introduces volatility. A debt-to-equity ratio of 1.55 means that a downturn in EBIT or a rise in interest rates could strain the company's finances. For context, its beta of -0.16 (lower than the market) suggests minimal volatility in normal conditions, but this could change if debt costs rise or margins contract. Additionally, the company's payout ratio of 146.80%—indicating it pays out more in dividends than it earns—raises concerns about sustainability.

Investment Conclusion

Hextar Global Berhad offers a high-risk, high-reward proposition. Its 28.22% ROE is justified by strong cash flow generation and a favorable industry outlook, but investors must carefully weigh the risks of its leveraged capital structure. For long-term investors, the firm's strategic alignment with Malaysia's agricultural growth and its ability to maintain profitability in a competitive sector make it an intriguing opportunity. However, those averse to debt-related risks may prefer more conservatively financed peers.

In conclusion, Hextar's ROE is a testament to its operational prowess, but its financial health hinges on prudent debt management. As the agrochemical sector evolves, Hextar's ability to innovate and adapt will determine whether its high leverage remains a strength—or a liability.