• Maintain BUY and MYR1.08 TP, 25% upside and c.3% FY25F yield. Synergy House’s FY23 core earnings of MYR27.7m (+73.6% YoY) is in line with our forecast, thanks to strong Black Friday and Christmas sales, and new order delivery for its US B2B client. We continue to like Synergy for its large exposure to international markets and fast-growing proven business model (by replicating Wayfair US’ success story). Current valuation is attractive as we foresee successful new market penetrations and recurring income from more stock keeping units (SKU) launchings to drive a rerating.

• FY23 results met expectations. Synergy’s core net profit of MYR27.7m (+73.6% YoY) meets our forecast. Post results, we make no change to our forecasts and 15x FY24F P/E-derived TP. Our TP implies 9x FY25F P/E – below its peers’ forward P/E of 18x and KLSCU forward P/E of 14x. A second interim 0.6 sen DPS brings FY23 DPS to 1.6 sen, consistent with guidance.

• Results review. YoY, Synergy’s FY23 revenue rose 39.2% to MYR270.2m, driven by higher demand from business-to-business (B2B) customers, as well as success market penetration and an increasing SKUs in its business-to- consumer (B2C) business. We see a YoY improvement in profit margin, in tandem with the improvement in operating leverage and sales mix (higher exposure to B2C sales which commands >10% higher GPM compared to B2B business as B2C sales skyrocketed 145.4% YoY, contributing 45% of its FY23 total revenue compared to only 26% in FY22). QoQ, 4QFY23 revenue surged 31.1% to MYR90.8m – underpinned by higher sales quantity due to festive sales in US and UK, and new order delivery to its US customer. The B2C segment grew MYR18.1m or 68.3% while B2B revenue grew MYR3.5m or 8%. 4QFY23 core net profit growth of 27.3% was slower than the revenue growth due to lower FX QoQ.

• Outlook. Subsequent to the IPO in 2023, Synergy continued to deliver robust earnings growth, paying out 30% as dividend and achieving a stronger balance sheet. Synergy’s B2C business is expected to scale up its product offerings to drive continuous revenue streams (Fig. 3) – mirroring its Wayfair US success story onto other markets, ie Wayfair UK (+>600% QoQ), Amazon US, Amazon UK, and Cenport US. Synergy will establish an e-commerce fulfilment centre locally and purchase sufficient inventories in its fulfilment centres, in anticipation of increasing B2C sales. The secret behind these success stories symbolises its focus on affordability and strategies by applying effective artificial intelligence and digital marketing in the platforms. An attractive FY24F PEG of 0.33x makes it attractive investment for superior growth rate and >30% ROE with potential rerating catalyst.

• Key downside risks include absence of long-term contracts with B2B customers, competition risk, and high exposure to FX fluctuations.

Source: RHB Research - 28 Feb 2024