• Initiate coverage with BUY and SOP-derived MYR5 TP, 56% upside and c.6% yield. Texchem Resources is set to stage strong FY22 growth and beyond, fuelled by the expected turnaround of Sushi King, solid growth from its industry-leading polymer engineering wing, and improved food and industrial units. The 7.3x FY23F P/E valuation is compelling to enter into an established firm with diverse and under-appreciated businesses that stand to benefit from an economic recovery and business transformation.

• Crown jewel’s turnaround. Focusing on the mass market (800-900k members) and possessing a halal certificate, Sushi King is set to recover strongly this year (FY21: loss-making) following right-sizing and cost rationalisation initiatives over the past years. With solid branding and strong infrastructure and resources, the restaurant unit should be able to swiftly execute its growth-focused strategy via kiosk and satellite formats ahead.

• Industry-leading integrated polymer engineering. With significant design and engineering capabilities from injection moulding to thermoforming to design for manufacturability (DFM), laboratory R&D, and 3D tool printing, TEX offers complete customised plastic parts, components, and precision packaging solutions. This unit has high order flows from data storage, semiconductor, and life science-related clients. Its know-how to manufacture electrostatic discharge materials of superior quality in various hardness and thickness allows it to build sticky relationships with its multi- national corporation (MNC) clients. They allow TEX to pass-on additional input costs, a competitive advantage vs lower-end polymer players.

• Growing industrial and food wings. As an integrated sourcing and distribution solutions for a wide range of chemicals, the industrial unit is likely to fare better given the normalisation of manufacturing activities in an elevated commodity prices environment. The food wing should continue to yield positive bottomline, bearing fruit from the strategy tweak to refocus on self-manufactured products and branding while lessening the low-margin trading business. The effective cost management, higher ASPs, and a favourable FX rate will continue to drive this segment.

• SOP-derived MYR5 TP (after a 20% conglomerate discount and 2% ESG premium) implies a blended 11.4x FY23F P/E. The current single-digit valuation and a P/CF of c.5x are compelling considering TEX’s margins expansion and above-industry earnings CAGR of 141% for FY20-23F. These are supported by a positive trajectory from all divisions, stemming from a leaner cost structure and change of strategy to focus on more value- added services and products. The recent acquisition of an additional 28% stake in Sushi King is timely to capture the earnings recovery trend and implies a valuation of MYR365m, which is almost on par with TEX’s current market capitalisation with minimal value conferred to its other businesses.

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

Source: RHB Research - 11 Aug 2022