• Keep BUY, new MYR1.61 TP from MYR1.08 (21% upside), c.2% FY25F yield. We are optimistic on the potential of data analytics to study customer behaviour and boost traffic, thereby driving scalability in Synergy House's business-to-consumer (B2C) e-commerce business. Given its higher-than- expected earnings growth (compelling FY24F PEG of 0.3x) and scalability, we have raised the P/E ratio from 15x to 20x FY24F earnings, resulting in our higher TP. The valuation is consistent with the 5-year average P/E of its closest regional peer, Zhiou Home Furnishing Tech.

• Business-to-business (B2B) sales growing. In 4Q23, Synergy fulfilled the first batch of a new order for interlocking drawers from its US wholesaler, Customer A. The order was in response to new safety standards enforced by the US Consumer Product Safety Commission, requiring interlocks in clothing storage units. Following positive customer feedback, Customer A placed 400 more container orders for one of the world’s largest hypermarkets to sell in stores and online in the US. While existing B2B product line orders are unchanged, we adjusted our B2B sales growth from flattish to a 10% hike. We revise FY24F and FY25F core earnings projections upwards by 12% and 12.5% to MYR40.2m (+54% YoY) and MYR51.3m.

• Embracing artificial intelligence (AI). At a recent site visit, we saw how Synergy fully integrated AI and data analytics into its operations, from design and development to project management, advertising, monitoring, marketing, and shipping. It has adopted cutting-edge semi-automatic drawing software for product design, and instead of manual photography, it uses 3D product images and room views. In advertising and monitoring, it conducts competitor analysis by monitoring changes in pricing and sales via AI-powered tools. It uses data analytics to identify most-searched keywords to reach its target customers. In marketing, it uses data analytics to access real-time data from online platforms on order replenishment and market trend analysis, including preferred colours and best-selling designs. AI is used in drafting product descriptions, while chatbots and AI are used for customer service. AI adoption enhances productivity and speeds up B2C sales growth.

• Expansion on track. Synergy had 185 employees as of March, and aims to reach 200 this year. In efforts to diversify its reliance on Wayfair US, its B2C sales in the UK and other new platforms are growing fast. Early this year, Synergy kept sufficient inventory in third-party fulfilment centres for new year sales in the US and UK after experiencing a shortage in 1Q23. This year, it is also increasing its B2C SKUs by 25%. As B2C sales growth is anticipated to outpace B2B, we expect higher-margin B2C sales to eclipse B2B sales in FY24. B2C sales are also expected to account for 70% of total sales in FY25.

• Key risks: Absence of long-term contracts with B2B customers, competition risk, and high exposure to FX fluctuations.

Source: RHB Research - 29 Apr 2024