• BUY, new SOP-based MYR3.67 TP from MYR4.40, 85% upside. Texchem Resources is expected to announce its 4Q22 and FY22 results on 23 Feb. We expect to see flattish-to-softer QoQ earnings growth for 4Q22, as its polymer engineering and food divisions were affected by macroeconomic headwinds. Still, signs of demand bottoming should propel its earnings recovery and growth this year. Post the steep share price correction, it is trading at 6.2x P/E – this is cheap, in view of its well-established and diverse businesses, strong cash flow generation, and c.8% FY23F yield.

• We expect the 4Q22 sales volume of its polymer engineering unit to be soft, due to the sharp deterioration in demand for hard disk drives (HDD). That said, our recent industry checks indicate that major HDD makers are guiding for QoQ growth for 1Q23. We expect earnings to recover beyond 1Q23, on the HDD demand recovery, new customer/business wins, and potential margin growth from lower material costs due to declining resin prices.

• The results of its food division were dampened by the depreciation of the USD, as well as weakening demand as a result of macroeconomic headwinds in the US and Europe. Moving forward, management aims to diversify sales across multiple geographic segments, while continuing to leverage on its wide network of suppliers, on top of effective supply chain and cost management.

• The restaurant segment should enjoy resilient net profit, supported by steady mass market demand, its strategic expansion plans, and a leaner cost structure. SSSG of restaurants should improve QoQ in the seasonally strong 4Q22, amid sturdy retail footfall during the holiday season – even though margins were squeezed by higher material and staff costs. Nonetheless, TEX adjusted its food prices by refreshing menus, to mitigate the higher costs.

• The sales volume of the industrial division looks to have bottomed on the back of stabilised chemical prices, the depletion of on-hand inventory of customers, and the re-opening of China. We expect TEX to chart a better performance ahead, as the group continues to penetrate into key major accounts and expand its specialty product portfolio.

• We cut FY22-24F earnings by 16.3%, 19.5%, and 17.1% after factoring in lower sales volume assumptions for the polymer engineering and food businesses. Our SOP-derived TP drops to MYR3.67 (after applying a 20% conglomerate discount and 2% ESG premium), implying a blended 11.4x FY23F P/E. TEX’s valuation remains undemanding, in light of its sustainable turnaround in profitability, diverse businesses, and handsome yield of 8%.

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

Source: RHB Research - 9 Feb 2023