• Maintain BUY and MYR1.55 TP, 22% upside and c.2% FY25F yield. We trim our FY24F EPS by 3.5% but keep our FY25F earnings and TP, on expectations of margin recovery. We remain positive on Synergy House’s prospects driven by its expansion into higher price-point segments on business-to-consumer (B2C) e-commerce platforms. Manpower costs should stabilise from FY25F as it approaches its target headcount. Coupled with stronger year-end festive sales and expected improving operational efficiency in FY25F, we believe SYNERGY remains an attractive investment opportunity.

• Strong revenue momentum. SYNERGY achieved a record high revenue of MYR114m, driven by a 56.2% rise in the business-to-business (B2B) segment and 78,5% in the B2C segment. This brings 9M24 revenue to MYR275m (+53.3% YoY). Core profit for the quarter was slightly below our expectation at MYR7.4m, with 9M24 core profit at MYR21.1m, reflecting a 23.8% increase. Major one-off items for the quarter included MYR11.1m for fair value gain on derivatives, MYR6.9m for unrealised loss on forex and MYR0.5m for the under-provision of tax. The YoY lower core profit margin is mainly caused by lower GPM from B2C stock clearance activities (in 3Q-4Q) and new lower-margin B2B order; higher freight rate (+c.200% YoY); and +59% rise in manpower costs.

• Temporary cost pressures. We raise our FY24F revenue target by c.3% following the stronger-than-expected revenue but lower our core earnings forecast by 3.5% due to higher operating costs, particularly manpower and freight expenses. For FY25F, we maintain our earnings forecast, expecting margin recovery from softening freight rates and improved cost efficiencies. Management guided that SYNERGY remains in its growth stage, focusing on long-term expansion despite short-term profitability pressures.

• Next game plan – unlocking premium segment. To sustain the revenue growth momentum, the company is focused on its continuous expansion into new platforms and countries while diversifying its product offering into other categories and exploring higher price-point segments in the B2C market in collaboration with international e-commerce platforms. On cost management, SYNERGY will control its cost of raw materials and continue to negotiate fixed freight rates for 2025 to stabilise logistics expenses. Manpower costs are also expected to stabilise as it nears its target headcount of 250.

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

• ESG. Our TP incorporates a 2% ESG premium.

Source: RHB Securities Research - 25 Nov 2024