• BUY, new MYR2.77 TP from MYR3.60, 122% upside and c.8% yield. 1Q23 core profit missed expectations, mainly on weak market demand and cost pressures. While we are cognisant of the weak results and margins compression, the share price also took a heavy beating and reflected the near-term weakness. Valuation is undemanding at 5.6x FY24F P/E, considering its well-established diverse businesses.

• Below expectations. Texchem Resources posted 1Q23 revenue of MYR268.5m (-12.7% YoY, +6.6% QoQ) and core profit of MYR0.5m (-96.2% YoY, -84.7% QoQ) after adjustments for an employees’ stock option scheme expenses. Weaker-than-expected demand and margins, and a high effective tax rate of 77.1% vs the prior period’s under-provision, led to this underperformance. EBITDA margin contracted 14.4ppts YoY to 20.3% on loss of economies of scale and higher input costs. The industrial (-13.1% YoY), polymer engineering (-33.2% YoY), and restaurant (-7.7% YoY) wings’ revenue weaknesses were partially cushioned by a better performance from the food division (+16.2% YoY).

• Similar to its retail peers, TEX’s restaurant wing (PBT: -86.6% YoY) was impacted by the fasting month, higher raw material and staffing costs, and normalised rental expenses. The food unit’s (PBT: -35.4% YoY) margins slipped 8.4ppts on higher operating costs. The industrial (PBT: -72.4% YoY) and polymer engineering (pre-tax loss: MYR0.7m) divisions were affected by soft market demand due to the global macroeconomic headwinds.

• Look beyond the near-term earnings weakness. We think TEX is now in deep value following its steep sell-down, considering the implied valuation of Sushi King at MYR365m (based on previous transactions) and healthy cash flow generation from its established diversified businesses. Following the right-sizing and business rationalisation initiatives over the past years, we are optimistic on its earnings recovery, underpinned by Sushi King’s strong brand equity and outlets expansion, the food unit’s growth via new market penetration and product range expansion, and steady volumes recovery and execution of new contract/business wins in the polymer engineering and industrial divisions.

• We cut our FY23-25F earnings by 51-62% as our previous estimates were rather optimistic – taking into account the sluggish market demand and higher cost base as a result of inflationary pressure. We lower our FY23F capex to MYR30m from MYR50m as per guidance given the aforementioned headwinds. Our SOP-derived TP drops to MYR2.77 (after applying a 20% conglomerate discount and 3% ESG premium), implying a blended 12.5x FY24F P/E. Key downside risks include escalation of input costs, weaker-than-expected sales, and unfavourable FX.

• ESG framework update. As there is now greater focus on the E pillar on critical climate change issues, we tweaked our ESG weightage. Henceforth, we assign a 50% weightage to the E pillar, followed by 25% each to the S and G pillars. See our 2 May thematic research for more details.

Source: RHB Research - 22 May 2023