• Maintain BUY with higher MYR1.55 TP from MYR1.36, 28% upside. We maintain our projected 3-year earnings CAGR of 29% for Synergy House, anticipating a strong 2H24 fuelled by festive sales demand. As one of Malaysia’s largest cross-border furniture e-commerce sellers, Synergy is well positioned to expand its market share amid a vast global online shopping market. Supported by expected higher tariffs on China-made products and expected improving consumer spending in the US, we raise our target P/E to 17x, establishing our new TP.

• Results preview. Historically, Synergy experiences a boost in sales orders from its business-to-business (B2B) customers during 3Q of any given year, as these clients prepare for end-of-year festive sales. This year, some orders carried over from 2Q24 into 3Q24 due to a recent shortage of logistics containers at ports. Following a low base for business-to-consumer (B2C) sales in 2Q24 – caused by substantial stock clearance activities – we anticipate continued YoY and QoQ growth in 3Q24. In our view, Synergy’s unhedged freight rates and currency exposure are mitigated by its cost passon strategy in 3Q24. Consequently, we project sales for the latter period to reach MYR100-110m, with a net profit of MYR8.5-10m.

• Favourable market climate. We believe the market has largely priced in the effects of a weaker USD on Synergy, despite the company hedging a substantial share of its receivables. Freight rates, having eased from their peak, are expected to remain stable in the near term. Lower-cost inventory should be recognised in 2H24, in our view, likely enhancing margins. We believe Synergy will persist in hedging freight and currency while passing on any additional costs to B2C customers as needed. With potential US rate cuts poised to boost consumer spending and higher tariffs on China-made goods potentially benefiting Asian importers, Synergy is well positioned to seize additional market share in the US, given that it is Wayfair’s sole Preferred Partner in Malaysia and a leading cross-border furniture e-commerce player.

• Valuation. Investors have likely digested the impact of the prior one-off provision and, with the company positioned in a large, addressable online shopping market (2024-2030 CAGR of 9%), we see significant growth potential. Hence, we raise our target P/E to 17x from 15x and set a new TP of MYR1.55 – in line with the 2-year forward 17x P/E of the Bursa Consumer Index. Future sustained earnings performance could further drive a potential valuation re-rating – expanding PEG ratio.

• We maintain our BUY call. Our new TP incorporates a 2% ESG premium, given Synergy’s 3.1 score vs the 3.0 country median.

• Key risks include geopolitical risks, high freight rate costs, uncollectibles from B2B customers, competition risks, and FX fluctuations.

Source: RHB Securities Research - 8 Nov 2024