• BUY, new TP of MYR1.36 from MYR2.01, 26% upside with c.1% FY24F yield. We cut FY24-25F earnings by 19.8% and 12.2% due to escalating freight rates and higher-than-expected expansion costs. Post lowering our 3- year earnings CAGR to 29% (from 39%), we also trim our target P/E to 15x from 25x, and roll forward our valuation year to FY25F. We remain upbeat on Synergy House, given its promising growth prospects as it rides on the Wayfair platform, while a new recurring income stream may emerge by onboarding other local furniture manufacturers onto Wayfair.

• Results preview. Due to the recent acquisition of a major customer Hillsdale, by Mellow River, excluding liabilities, SYNERGY should record a bad debt provision from this customer amounting to USD2.9m in the upcoming quarter. As Wayfair has reported and guided for higher promotional intensity in 2Q24 and 3Q24, we expect to see lower profit margins in the same period – premised on anticipated stock clearance activity on its bedroom sets listed on the Wayfair US platform, as most do not have an anti-locking system. Coupled with potential FX hedging losses (as USD/MYR rate has appreciated QoQ), SYNERGY is likely to chalk a net loss in 2Q24.

• Escalating cost environment. Despite hedging part of its freight costs, container freight rates have more than tripled YTD, on top of a delayed cost pass-through to end-customers in the business-to-consumer (B2C) segment. After a recent briefing, we also expect administrative expenses to be higher than what we previously pencilled in, with steeper staff costs and additional office rental, in preparation for new B2C platforms and the third engine, the Wayfair e-commerce enabler partnership. These factors are likely to negatively impact the FY24F overall group margin, as the management expects contributions from the lucrative third engine business to materialise only by FY25. Moreover, we foresee the escalating container shortage to affect inventory delivery of the B2C business for 1Q25.

• Positive inquiries on Wayfair onboarding partnership. Despite temporary cost challenges, we remain confident in Synergy House's execution, track record and capabilities in the e-commerce space, especially compared to new entrants. It has received positive inquiries from major furniture manufacturers to be onboarded onto Wayfair US. Synergy can receive a 10% sales charge from these partnerships. Future developments, particularly in securing strategic partnerships, could prompt a re-evaluation of our target P/E and outlook.

• Key risks include high freight rate costs, uncollectible debts from B2B customers, competition risk and FX fluctuation.

Source: RHB Research - 7 Aug 2024