• MYR0.47 FV based on 13x FY25F(Jun) P/E. Sorento Capital aims to raise MYR57.4m from its IPO to repay its bank borrowings, expand its distribution reach, carry out marketing and fund its working capital. The company is set to benefit from the property boom nationwide which is expected to boost its project-based sales and replacement market sales via dealers from higher renovation activities. With a 25.5% earnings CAGR (2024-2027F), the IPO price values the stock at 10x FY25F P/E.

• Riding the property and tourism boom. Its products, known for functionality and aesthetics, are approved by IKRAM, WaterMark, The Construction Industry Development Board (CIDB), National Water Services Commission (SPAN) and MyHijau, ensuring customers get the highest quality and safest products on the market. Coupled with its sustained focus on hygiene, Sorento is well-positioned to capitalise on the booming property and construction activities. Demand for its products correlates with the higher demand for accommodation and public sanitary facilities to support the resurgence of tourism industry.

• Beneficiary of the stronger MYR. The company’s leadership in the sanitary ware industry, combined with the strengthening of MYR/CNY (+6.4% YTD), have provided a competitive edge in terms of cost efficiency. As key raw materials are imported from China, the stronger MYR has led to lower procurement costs, enhancing profit margin. Additionally, Sorento raised its selling prices in August this year, further improving profitability while maintaining its market leadership position.

• Extensive distribution channels. Increased number of exclusive Sorento retail stores will lead to double wins in the form of amplified brand recognition and wider distribution reach nationwide to accelerate its market share gain. Over the next three years, the company aims to expand its current dealer network of 664 by recruiting another 200 new dealers across Malaysia. Meanwhile, it will focus on the underexplored affordable housing market by property developers, with initiatives like the 1Malaysia Housing Programme (PR1MA).

• Target on affordability. The projected growth of Malaysia’s hardware store market is expected to reach USD495.5m in 2024, with a 2024F-2029F CAGR of 10.1% (Statista). This presents a key opportunity for the company’s massmarket brands, i-Born and Cabana. These brands are tailored for budgetconscious customers, offering affordable yet durable sanitary ware.

• Forecasts and valuation. We project a 3-year earnings CAGR of 25.5% and ascribe a 13x P/E to its FY25F earnings to derive our MYR0.47 FV. The valuation is in line with the peer average of 13x.

• Key risks: FX fluctuations, slowdown in property market, and dependence on third-party manufacturers.

Source: RHB Securities Research - 14 Oct 2024