• SOP-based MYR4.46 FV, 62% upside. Texchem Resources is poised to return to its glory days with a 68% forecasted growth in FY22F, fuelled by the expected turnaround of Sushi King, a much improved food division, and growing performance from both the industrial and polymer engineering divisions. Current valuation of 8.3x FY22F P/E is a very compelling level to buy into a proven corporation with diverse and stable businesses that stand to benefit from the economic recovery and business transformation.

• Crown jewel’s turnaround. Sushi King was the first Japanese restaurant chain to sell sushi on kaiten-concept in the 1990s and remains the largest Japanese restaurant chain with 121 outlets in Malaysia. Focusing on the mass market (813,000 members) and possessing a halal certificate, it is set to recover strongly in FY22F (loss making in FY21), following right-sizing and cost rationalisation initiatives over the past years. Possessing a strong infrastructure and solid resources, the restaurant unit should be able to swiftly execute its growth-focused strategy (kiosk and satellite) ahead.

• Integrated polymer engineering solutions provider. With relevant design & engineering capabilities, TEX is able to offer complete customised plastic parts, components, precision packaging solutions from material customisation, design, mould fabrication and high volume manufacturing. With its exposure to high-growth sectors – eg electric & electronics, semiconductors, hard disk drives, aerospace, automotive and the successful diversification to medical life sciences-related products (c.24% of divisional revenue) – this segment now has a diversified portfolio to cushion against volatility. It will also be able to pass-on additional costs from high material prices given the quality of products and supply commitment.

• Growing industrial and food wing. As an integrated sourcing and distribution solutions for a wide range of chemicals, the industrial unit is likely to fare better given the resumption of manufacturing activities. With elevated commodity prices, it will continue to book strong numbers in tandem with sales volume growth. The food wing should yield positive results from a strategy change to refocus on strengths in self-manufactured products, branding, and phase-out of the low-margin trading business.

• An SOP-derived FV of MYR4.46 (after applying a 10% conglomerate discount) implies a blended FY22F P/E of 14.5x – undemanding considering its improving margin and above-industry growth. With a CAGR of 130% for FY20-23F, all business divisions are expected to yield positive results from margin expansion given its leaner cost structure and change in strategy to focus on more value-added services and products. Furthermore, the acquisition price of MYR102.2m for an additional 28% stake in Sushi King implies a valuation of MYR365m, which is already as much as TEX’s current market capitalisation, with zero value accorded to the remaining industrial, polymer engineering, and food businesses.

• Key risks. Escalation of input costs, weaker-than-expected sales/orders, huge fluctuation of chemical prices, credit risk, and unfavourable FX rates.

Source: RHB Research - 11 May 2022