• BUY, MYR2.01 TP, 25% upside, with c.2% FY25F yield. Synergy House has been engaged as the first Malaysian authorised service partner for a leading US online home retailer. This strategic move will expand its revenue stream by FY26 with minimal capital impact, and solidifies its global position as it transitions from being an e-commerce vendor to an e-commerce enabler. Its current valuation of 15.7x FY25F P/E offers a compelling investment opportunity, especially with a 3-year earnings CAGR of 34%.

• Confidence spurs partnership. Synergy's strategic pivot to becoming an e- commerce vendor on third-party platforms since 2019 – amidst US-China geopolitical tensions – has proven timely. Leveraging its exceptional performance and robust rapport with one of the US' largest online home retailer (the “Retailer”), Synergy has now secured its status as the first Malaysian authorised service partner on the Retailer’s e-commerce platform, cementing its position as a trusted industry leader.

• Leads for online home retailer giant. As an authorised service partner, Synergy will primarily support local Malaysian manufacturers and vendors, ensuring a smooth integration into the Retailer’s global e-commerce system. It will collaborate with the Retailer to co-host online and offline events aimed at on-boarding new vendors of various home furnishing products and raising awareness about the latter’s e-commerce ecosystem. Once vendors are successfully on-boarded, Synergy will work closely with them, offering various services that include offering strategic advice on product selection, connections to other service providers, advertising and promotional support, and troubleshooting issues related to operating on the platform.

• Eyeing new revenue streams for 2026. This milestone will open up a new income stream for Synergy, encompassing potential one-off on-boarding services and recurring transactions. This new business model will create growth opportunities beyond its current business-to-consumer and business-to-business (B2B) operations, with a minimal impact on working capital. As the new revenue stream is expected to contribute to group numbers from FY26 onwards or later, we maintain forecasts and TP (25x FY24F P/E) until there is further news on this development and partnerships with any local vendors.

• Elevated status supports valuation. Synergy has advanced from being a Malaysian cross-border e-commerce furniture seller and a "furniture developer," to becoming the first Malaysian authorised on-boarding service partner for the world's leading e-commerce home retailer. This move up in the value chain further solidifies its position in the global furniture industry. Growth prospects should be exponential, as it will generate recurring income streams by hosting and supporting various vendors in the future. As such, we think its current market valuation of 15.7x FY25F P/E is conservative. Key downside risks include high freight rate costs, absence of long-term contracts with B2B customers, competition risk, and high exposure to FX fluctuations.

Source: RHB Research - 12 Jun 2024