• Keep BUY, new MYR1.50 TP from MYR2.23, 84% upside. Texchem Resources showed promising signs in 3Q23 as losses narrowed, driven by improved market demand and more favourable seasonality. While acknowledging recent weak results, we anticipate a further narrowing of losses – leading to a turnaround in FY24, thanks to the gradual improvement in market conditions and the low FY23 base. The current depressed valuation offers a valuable entry point into an established company with diverse and underappreciated businesses.

• Below expectations. TEX recorded 9M23 core losses of MYR7.1m (vs MYR27.5m profit in 9M22) after adjustments for an employee stock option scheme expense and gain on disposal of investment in associate. The disappointment came from weaker-than-expected topline and margins, and high effective tax rate – from the non-availability of tax relief from losses incurred by certain subsidiaries and under-provision from the prior period.

• Results review. YoY, 9M23 revenue dropped 15.6% to MYR752.2m, due to weaker market demand from the industrial and polymer engineering divisions, while its restaurant and food divisions were impacted by weaker consumer sentiment. 9M23 EBITDA margin contracted 3.5ppts YoY to 6.8% on the loss of economies of scale and higher input/operating costs. QoQ, 3Q23 revenue rose marginally by 1.2% to MYR243.3m, following volume recovery in the polymer engineering division and better seasonality for the restaurant division, given the absence of Ramadan, albeit dragged down by the industrial division. Consequently, the company incurred a narrower core loss of MYR2.1m in 3Q23 (vs MYR5.5m loss in 2Q23).

• Outlook. We anticipate a stronger 4Q, considering the expected improved seasonality for the restaurant division during the year-end festive season, in addition to a stronger USD trend expected to enhance the performance of the food and polymer engineering divisions. Management believes the volume in the industrial wing may have bottomed out because of the depletion of customers’ on-hand inventory and the stabilising chemical prices. Improving market conditions and new contract/business wins should also lead to a steady volume recovery for the polymer engineering division moving forward. All in, we look forward to a profitable FY24 for TEX after taking into account the aforementioned factors.

• Forecast and valuations. We now forecast MYR7.6m in losses for FY23 (from MYR5m profit), while reducing our FY24-25F earnings by 28-39% as the uneven recovery is taking longer-than-expected. As a result, our SOPderived target price is lowered to MYR1.50 (after applying a 20% conglomerate discount and 4% ESG premium), implying a blended 13.9x FY24F P/E. Maintain BUY, as the steep share price decline to a depressed valuation offers a buying opportunity to a diverse mini conglomerate with solid balance sheet and strong 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 Securities Research - 27 Oct 2023