• Still BUY and MYR1.44 TP, 71% upside. 1H24 results met expectations, showing a strong rebound in the polymer engineering division and gradual improvements across other business units. We believe the worst is over, and anticipate a sustainable turnaround – driven by further volume recovery. The current valuation is appealing in view of Texchem Resources’ well- established and diverse businesses with sturdy balance sheet and strong cash flow generation.

• Met expectations. TEX posted a 2Q24 core profit of MYR1m, bringing 1H24 core losses to MYR0.4m (1H23: -MYR5m). We deem this performance as in line with our expectations and anticipate stronger earnings ahead, driven by volume recovery and margins expansion from operating leverages across all business units.

• Results review. YoY, 1H24 revenue rose 12.1% to MYR570.4m, primarily due to promising volume recoveries in the industrial and polymer engineering divisions. 1H24 EBITDA margins expanded slightly by 0.1ppt to 6.9%, with margins improvement in these divisions from higher sales and operating leverage, offset by increased input and operating costs in the food and restaurant division. QoQ, 2Q24 revenue increased 6.9% to MYR294.7m, reflecting the continued volume recovery. Consequently, TEX recorded a profitable 2Q24 with a net profit of MYR1m.

• Key growth drivers. TEX guided, and we concur, that the polymer engineering wing is set to see strong earnings rebounds with continuous volume recovery and new business wins from hard disk drive and semiconductor customers, along with steady growth from medical life science clients. The industrial unit is also experiencing a sales volume recovery on easing customer inventory adjustments and stabilising chemical prices. Management is also seeing demand spillover to ASEAN from China due to the US-China trade war, and is working to capture this market share.

• Enhancing operational efficiency. The restaurant division has achieved breakeven by continuously enhancing cost optimisations, and increasing marketing and promotional efforts to boost sales. We anticipate a stronger 2H24, driven by improving seasonality and positive developments in the consumer sector, which could benefit the unit’s target market. Meanwhile, the food division may continue to face challenges due to FX control measures in Myanmar, but management plans to stimulate local demand and diversify the supply chain away from there to mitigate this impact.

• Forecasts and ratings. Post results, we make no changes to our earnings forecasts and SOP-derived TP of MYR1.44 (includes 0% ESG premium/discount), as results were in line. 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 - 26 Jul 2024