Valuation / Recommendation

We recommend SUBSCRIBING to Sorento Capital Berhad (Sorento), with an FV of RM0.45 based on 13.2x CY25F EPS, indicating a potential upside of 22% to the IPO price. Our target PE valuation reflects a 40% discount to global comparable peers’ average, given Sorento’s smaller market cap and its niche focus in retailing bathroom and kitchen sanitary wares. Key re-rating catalysts for the stock include stronger residential property sales and further market share gain.

Investment Highlights

Robust property market to drive growth. Sorento is primarily involved in marketing, distributing, and selling bathroom and kitchen sanitary wares. The company recorded a commendable 3-year revenue CAGR of 31.8%, rising strongly from RM66m in FY21 to RM152m in FY24. Its notable sales growth is tied to the robust upswing in the Malaysian property sector, particularly the impressive recovery following the COVID-19 pandemic from 2021 to 2023. Overall, a robust property market will result in more new property launches and increased numbers of secondary market transactions, both of which will benefit Sorento.

Adding more dealers. Sorento plans to strengthen its distribution network by adding 200 new dealers over the next three years, expanding beyond its current base of 664 dealers across Malaysia. As part of this strategy, the company will allocate RM20m (including RM5m from IPO proceeds) to offer subsidies to both new and existing dealers, focusing on locations where it seeks to boost market presence or capture new market share. In our view, dealer expansion is critical for Sorento, as dealer-based sales will remain a key revenue driver (55%-60% of total sales) for the company moving forward.

Growing margin in FY26-27F. Sorento's GP margins expanded from 31.4% in FY21 to 47.6% in FY23, mainly due to its effective cost management strategies, such as paying suppliers faster to get better pricing, buying in larger volumes, and switching to cost-competitive Chinese suppliers. However, its GP margin subsequently normalised to 42.5% in FY24 because of rising raw material and freight costs. We expect margins for FY25F will experience a slight decline before rebounding in FY26-27F due to increased sales and more favourable inventory costs. Given that 90% of inventory purchases were sourced from overseas third-party manufacturers (primarily transacted in USD and RMB), Sorento will also stand to benefit from the strengthening of the Ringgit.

Risk factors for Sorento include (1) Fluctuation in raw material cost; (2) Dependence on third-party manufacturers; and (3) Exposure to forex risk.

Source: Mercury Research - 15 Oct 2024