Sorento Capital Berhad (SORENTO, 0326) is set to debut on the Bursa Ace Market on 28 Oct 2024. SORENTO is primarily involved in the marketing, distribution, and sale of bathroom and kitchen sanitary wares. We expect SORENTO to register core net earnings of RM30.0m and RM34.4m for FY25F and FY26F, respectively. BUY with a fair value of RM0.42, premised on a weighted average 12x PER (20% discount to sector average due to its smaller market cap) over FY25F EPS.

SORENTO caters to a broad customer base, offering a diverse range of bathroom and kitchen sanitary ware products spanning from premium to affordable segments. Apart from its flagship brand ‘Sorento’ plus other in-house brands namely 'Mocha', 'Cabana' and 'i-Born', the Group also distributes luxury foreign brands such as ‘Bravat’ (non-exclusive) and ‘Infinity’ (exclusive) in Malaysia. Of the 5,239 total stock keeping units (SKUs) offered, 4,191 (80%) are in-house brands. Currently 100% of its revenue is generated solely in Malaysia, mainly derived from: (i) dealers (ii) property projects and, (iii) direct online stores. As part of its growth strategy, RM6m has been allocated from its IPO proceeds to recruit new dealers, as this segment contributes up to 60% of total revenue. SORENTO plans to add 200 new dealers over the next three years, expanding its current network of 664 dealers across Malaysia. The strategy also includes subsidies for both existing and new dealers to support enhancements and upgrades, which are expected to drive market share growth. The company emphasizes on branding and promotional marketing to enhance product visibility and capture public attention hence has allocated RM6m for a comprehensive road-map including advertising, promotions, and industry event participation.

The property industry has recorded a CAGR of 6.21% from 2021 to 2023. Therefore, as more projects are introduced, the demand for building materials and fixtures, including bathroom and kitchen sanitary wares will rise accordingly. With over 30% of revenue derived from project-based sales, the positive correlation between property developments and demand for bathroom and kitchen sanitary wares is driving favourable growth within the project-based division.

We project earnings to grow at a CAGR of 23.4% for FY24-FY26F driven by (i) expansion of its dealer network, (ii) growth in property industry, and (iii) ongoing branding efforts. Its balance sheet is strong with net gearing of less than 0.1x as of FY24, and we expect Sorento to be in a net cash position in FY25.

Source: Rakuten Research - 21 Oct 2024

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