• Keep BUY and MYR1.36 TP, 26% upside. Core profit of MYR6.4m is in line with our forecast. We expect stock clearance impacts to diminish in the coming quarters and remain optimistic on Synergy House’s direction, particularly with its business-to-consumer (B2C) business expansion into new platforms this year. While expansion costs may impact margins in the short term, the long-term growth outlook stays strong. With an anticipated stronger 2H performance, a sturdy balance sheet, and positive operating cash flow, Synergy presents a compelling investment opportunity.

• Result review. Synergy posted a 2Q24 revenue growth of 32.1% YoY to MYR77.4m, driven by 57.6% and 10.9% rises in the business-to-business (B2B) and B2C segments. Core profit for the quarter was up 30.6% YoY to MYR6.4m, with 1H24 core earnings at MYR13.7m (+68.2% YoY). Major one- off items include MYR13.4m for trade receivables impairment and MYR3.15m for trade credit insurance. While efforts to recover these funds are ongoing, the potential cash flow impact is not expected to hinder B2C growth. In preparation for business growth, Synergy increased its headcount from 140 to 194, leading to a 42% rise in manpower costs in 6M24 vs 6MFY23. We make no changes to our earnings estimates and TP.

• Promising B2C growth despite challenges. The B2C segment continues to show strong growth, now accounting for 54% of total revenue, up from 52.2% in 1Q24. The summer season in the US began late in 2Q, leading to increased consumer spending on outdoor furniture and other necessities rather than Synergy’s indoor furniture. In the UK, despite facing logistics challenges and sales losses due to damaged inventory, the B2C revenue trend remained robust. The 2Q24 B2C revenue was MYR6.58m, slightly higher than the MYR6.53m recorded in 1Q24. Despite stock clearance activities and sales losses in 2Q24, total units sold in the B2C segment reached c.126,000 units, up from 120,000 units in 1Q24. On the other hand, we anticipate higher shipments to B2B clients in 2H24, particularly in 3Q24, as clients prepare for festive sales in 4Q24.

• Future efforts. Synergy is conducting a detailed review of inventory health to reduce storage costs and expedite clearance of old stock. The company is also exploring higher price segments beyond the previous USD300 limit.

• ESG. Synergy uses particle boards, which do not contribute to more forest deterioration as the raw materials of its home furniture sold have obtained Forest Stewardship Council or FSC certificates.

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

Source: RHB Research - 19 Aug 2024