• Keep BUY with a new MYR2.23 TP from MYR2.77, 97% upside and c.7% yield. Texchem Resources’ 1H23 slumped into loss on weaker-than- expected sales and cost pressures. We cut our numbers accordingly to reflect the prolonged weak market environment. Nevertheless, 2Q is usually seasonally the weakest quarter of the year and an uneven earnings recovery from its various business segments can be expected from 3Q onwards as management is aiming to remain in the black in FY23F.

• Below expectations. TEX posted an 1H23 core loss of MYR5m (vs MYR20.6m profit in 1H22) after adjustments for an employees’ stock option scheme expense. Weaker-than-expected topline and margins, a high effective tax rate, and an under-provision from the prior period, led to this underperformance. YoY, 1H23 revenue dropped 16.4% to MYR509m due to a weaker market demand from industrial and polymer engineering divisions, while its restaurant and food divisions were impacted by weaker consumer sentiment and higher operating cost. 1H23 EBITDA margin contracted 3.4ppts YoY to 6.8% on loss of economies of scale and higher input costs.

• Results review. QoQ, 2Q23 revenue declined 10.4% to MYR240.5m primarily due to a seasonal weaknesses in the food and restaurant divisions. Results for the food wing were adversely affected by the fishing ban imposed by the Myanmar Government from April to June. Additionally, the restaurant division faced a more significant impact from Ramadan and higher input costs. As a result, the company incurred a core loss of MYR5.5m in 2Q23.

• Outlook. While we acknowledge the weak results and margins compression in 1H23, better numbers can be expected in 2H23. From channel checks we observe signs of bottoming in the industrial wing due to easing customers' inventory adjustments and stabilizing chemical prices. There is still uncertainty surrounding the polymer engineering division's outlook amid weakness in HDD and semiconductor customers. The execution of new contracts/business wins in the polymer engineering and industrial divisions should start to contribute positively. Meanwhile, the approaching 2H23F should bring a seasonal pickup for the restaurant and food divisions. With that, we anticipate a QoQ improvement in 3Q23F earnings.

• Forecast and ratings. We cut FY23-25F earnings by 68%, 21%, and 14%, considering the weaker-than-expected market demand and higher-than-expected cost base. Consequently, our SOP-derived TP drops to MYR2.23 (after applying a 20% conglomerate discount and a 4% ESG premium), implying a blended 12.7x FY24F P/E. Despite the recent earnings miss, we maintain BUY as we believe the worst is over now and share price has corrected to a near-record low level (6.5x FY24F P/E), backed by sound balance sheet and cash flow generation.

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

Source: RHB Research - 28 Jul 2023