• MYR0.72 FV based on 15x FY25F P/E. As one of Malaysia’s Top 3 decorative surface providers, Topmix is poised to benefit from the growing property market and a stronger MYR given its role as an importer of raw materials. The company's focus on brand growth, geographic expansion, particularly into the Thai market, and product diversification into affordable surface materials is expected to drive a 38.3% earnings CAGR from FY23-26F. With above- average earnings growth, Topmix's FY25F P/E of 10x is attractive compared to the 20x forward P/E of its local peers.

• Riding the property boom. High-pressure laminate (HPL) products are widely used in residential and commercial properties, which made up 71% of property transactions in 1Q24, according to the National Property Information Centre (NAPIC). With a strong 2024 outlook for Malaysia's property market, Topmix is well-positioned to benefit, especially in Johor, where it leads the southern market amid rising foreign investment and the ongoing Johor Bahru– Singapore Rapid Transit System (RTS)-Link project.

• Net beneficiary of stronger MYR. Its HPL products are priced >40% lower than foreign counterparts allowing the company to maintain low demand elasticity and increase selling prices annually by at least 2%. Without raising prices this year, we anticipate to see further margin expansion from lower raw material costs, benefiting from the strengthening MYR as most of its raw materials are imported from China (CNY) and South Korea (USD).

• Expanding to a major global HPL importer, Thailand. To expand market share locally, Topmix will increase its central region warehouse capacity by up to 2x and establish its presence in Penang. In Thailand, where the population is more than twice to that of Malaysia, Topmix is venturing into a larger market through a 35%-owned associate, Favor Topmix (Thailand). This move is strategic – leveraging on its partners’ strong distribution channels and a solid customer base in Thailand as the country has become the world’s second- largest importer of HPL, with 10,614 shipments from Mar 2023 to Feb 2024, capturing 22% of the global market share (Volza Grow Global).

• Venture into affordability. Topmix will begin manufacturing melamine faced chipboards (MFC) by October to offer cost-effective surface materials to existing customers, particularly budget-conscious property developers, and new target customers – furniture manufacturers in Malaysia.

• Earnings forecast and valuation. We project a 3-year earnings CAGR of 38.3%, and ascribe 15x P/E to its FY25F EPS to derive MYR0.72 FV, in line with the 15x 5-year average of 2-year forward P/E of the Bursa Malaysia Industrial Production Index (KLPRO). Key risks: Shortage of supplies, absence of long-term contracts, FX fluctuations, and market trend changes.

Source: RHB Research - 26 Aug 2024