• Maintain BUY, with a lower SOP-derived MYR4.40 TP from MYR5.00, 77% upside and c.7% yield. At a briefing yesterday, management was cautiously optimistic on prospects. Moving forward, the group maintains its focus on improving its operating efficiency while ensuring each business unit grows and is sustainable. We believe the recent share price weakness presents a good buying opportunity into an established company, with a diverse and under-appreciated businesses, that stands to benefit from business transformation and earnings recovery.

• Restaurant division. Texchem Resources expanded its kaiten-concept chain restaurant and kiosk convenience in out-of-town areas due to lower competition and labour cost, bringing its YTD total outlet count to c.130. Management shared that the margin for this division will be slightly impacted by higher staff cost amid the minimum wage policy. Nevertheless, the group will pass through some of the cost with various brand refreshing exercises. We expect SSSG for restaurants to improve significantly in the seasonally strong 4Q, amid a sturdy retail footfall during the holiday season.

• Food division. We gathered from management that its supply for the food division was slightly affected in Myanmar, as local fishermen reduced their aquaculture activities due to fuel price hikes. Nevertheless, this unit remains resilient due to its ability to leverage on a wide network of suppliers, coupled with an effective supply chain, cost management, and favourable FX.

• Polymer engineering division. The average utilisation rate of the polymer engineering production plant was at a healthy level of c.70%. Moving forward, management projected the sales volume from the hard disk drive (HDD) segment to soften. Nevertheless, this should be cushioned by higher demand from the medical life sciences industry, new customers from business wins, a stronger USD trend, and potential margin expansion from lower material costs due to declining resin prices (-30% from its peak).

• Industrial division was impacted by a softer demand as a result of customers’ inventory adjustment and down trending chemical prices. However, the group aims to penetrate into key major accounts and diversify into specialty chemical supply to further grow this division. Besides, volumes should recover on the back of stabilized prices and depletion of on-hand inventory for some of the customers.

• We adjust lower FY22F-24F earnings by 11.4%, 8.1%, and 11.5%, as we bake in higher staff cost assumptions for the restaurant division and estimate a softer demand for the industrial division. Our SOP-derived TP was also adjusted to MYR4.40 (after a 20% conglomerate discount and a 2% ESG premium), which implies a blended 10.9x FY23F P/E. The current single digit valuation and a P/CF of c.4x are compelling, considering its sustainable turnaround in profitability and above-industry earnings CAGR of 135% for FY20-23F.

• Key risks: Escalation of input costs, weaker-than-expected sales/orders, fluctuation of chemical prices, credit risks, and unfavourable FX.

Source: RHB Research - 3 Nov 2022