• Initiate BUY with MYR1.08 TP, 57% upside with c.3% FY24F yield. Synergy House stands out from other listed furniture players with its asset- light model – focusing on design and primarily selling online (80% of 9MFY23 sales). This spares it from high overhead costs and allows it to be versatile and quick in adapting to market changes. With a FY24F ROE of 32%, we believe its current valuation is compelling – it is trading at a low FY24F PEG ratio of 0.29x and at a steep discount to the peer average.

• Set apart from other listed furniture players. Synergy has evolved from a furniture manufacturer in 1990 into a pure-play furniture distributor that fully outsources manufacturing works. Thanks to its asset-light business model (operating in lower-cost Asian nations like Malaysia), the group can now channel all resources into design & development (D&D) – from 360 designs in 2019 to a whopping 2,500 as of Dec 2023. As Malaysia’s only cross-border e-commerce furniture distributor, Synergy has a foothold in the US, the UK, and United Arab Emirates (UAE) via its ready-to-assemble (RTA) furniture exports. These are considered affordable fast-moving consumer goods (FMCG).

• Business-to-consumer (B2C) sales to eclipse business-to-business (B2B) sales. In response to the furniture stock oversupply, the group stands out from peers by implementing product differentiation strategies across various markets and platforms. As of 9M23, B2C sales grew to 43% of total sales (FY22: 25.6%). Note: Around 80% of total B2C designs are generating healthy recurring monthly sales on reputable third-party e-commerce platforms. By mirroring its Wayfair US success in other platforms, the group’s higher-margin B2C sales is on track to reach 70% of total sales by 2025. Going forward, Synergy is setting B2C footprints in new markets, including Germany and France.

• High exposure to online sales. Synergy has adeptly steered over 80% of its customer base and total sales into the rapidly expanding e-commerce realm. This includes not only its B2C segment but also a significant portion of its B2B customers, with approximately 65% engaging in online furniture retail. The group's focus on online sales is timely, as online furniture sales growth (2022-2028 CAGR of 12.6%) has recently surpassed traditional physical store sales growth. Major platforms like Wayfair and Amazon – where Synergy has a strong presence – dominate this sector, contributing significantly to the global market. The US, Synergy's primary market, drives this growth with its high population, spending power, and digital infrastructure that is conducive to online shopping.

• Exponential earnings growth. Coupled with its expansion plans, Synergy is forecasted to grow at a 3-year earnings CAGR of 38.1%. We peg a FY24F P/E of 15x to arrive at a MYR1.08 TP. Key downside risks include: i) Dependency on third-party manufacturers, ii) absence of long-term contracts with B2B customers, iii) competition risk, and iv) high exposure to FX fluctuations.

Source: RHB Research - 15 Jan 2024