• Still BUY and SOP-derived MYR1.44 TP, 62% upside and c.3% yield We emerged from Texchem Resources’ post-results briefing feeling upbeat on its prospects. We believe the worst is over, and TEX is poised for a sustainable turnaround, driven by a strong recovery in its polymer engineering and industrial divisions. While we conservatively factor in muted contributions from the restaurant and food divisions in our SOP valuation, there is already ample upside to the TP – making it a compelling case.

• Polymer engineering. The polymer engineering division is set to capitalise on the recovery momentum in the hard disk drive (HDD) and semiconductor sectors, with steady growth also expected from medical life science clients. We learnt that a few new high-margin projects are ramping up nicely, with additional initiatives in the pipeline, which should contribute to further margin expansion, coupled with positive operating leverage. We forecast a 3- year (FY23-26F) PBT CAGR of 110% for this division.

• Industrial. The industrial division is also experiencing a recovery in sales volume, driven by easing customer inventory adjustments and stabilising chemical prices. The recent uptrend in chemical prices is expected to improve margins in the near term due to lower inventory costs. Management's focus on bulk chemicals is yielding positive results, with expectations of increased sales and market share moving forward.

• Food. The food division faced operational challenges since 2Q23 due to FX control measures in Myanmar, which initially mandated 65% of export proceeds to be converted into the local currency at unfavorable fixed rates. However, the recent adjustment in these measures (further reducing the mandatory conversion rate to 25%) should mitigate impact and help narrow the division’s losses. Beyond the immediate term, management is also focused on growing local sales to minimise FX-related impact, and plans to diversify the supply chain to Thailand by FY24 as a mitigation strategy.

• Restaurant. Since restructuring the restaurant team, the new management has introduced a more creative menu and launched enhanced promotional and marketing initiatives, resulting in positive sales traction (2Q24 sales: +10.6% YoY). Management guided that the sales momentum has sustained into 3Q24F, anticipating further improvement in 2H24 due to seasonal factors. The new team has also consolidated suppliers, which enhanced its bargaining power. Moreover, the strengthening of the MYR is expected to contribute to lower raw material costs moving forward. TEX recently expanded into Indonesia and plans to open four stores in FY24, which could be a significant growth engine given the large market size.

• Forecasts and ratings. Post briefing, we make no changes to our earnings forecasts and MYR1.44 TP (includes a 0% ESG premium/discount). Our TP implies a blended 11.5x FY25F P/E. Key risks: Escalation of input costs, weaker-than-expected sales/orders, fluctuation of chemical prices, and unfavourable FX rates.

Source: RHB Research - 15 Aug 2024