• Maintain BUY and MYR1.44 TP, 62% upside, c.3% yield. Although Texchem Resources’ 1Q24 results missed expectations, we see the rebound in the industrial and polymer engineering divisions as a positive sign. Earnings are expected to improve across all business units on further volume recovery and seasonal factors. Its current low valuation presents an attractive entry point into the diverse businesses, supported by a solid balance sheet and strong cash flow generation.

• Below expectations. 1Q24 core loss of MYR1.3m (1Q23: MYR0.5m profit) was below expectations on weaker-than-expected sales and margins from its restaurant and food divisions, owing to high input costs, seasonal factors, and unfavourable FX policies in Myanmar.

• Results review. YoY, 1Q24 revenue rose 2.7% on volume recovery from the industrial and polymer engineering divisions, despite being offset by the food and restaurant divisions (due to soft consumer sentiment and the earlier timing of the Ramadan fasting month; 2024: 11 Mar vs 2023: 23 Mar). EBITDA margin contracted 1.1ppts to 6.5% due to higher input and operating costs from the restaurant division, despite margin improvements in the industrial and polymer engineering divisions from higher sales, leading to operating leverage. QoQ, 1Q24 revenue rose 14.2%, mainly from the industrial division which saw better market demand. Consequently, 1Q24 core losses narrowed to MYR1.3m (vs MYR3.2m in 4Q23).

• Outlook. The polymer engineering division should continue to ride on the recovery momentum among hard disk drive (HDD) and semiconductor customers, while medical life science customers are expected to grow steadily. The industrial division’s strong rebound should be sustained due to easing customer inventory adjustments and stabilising chemical prices. Volume recovery and execution of new high-margin businesses should drive margin expansion from operating leverage in both divisions. While input cost pressures remain for the restaurant division, we do not expect the division’s losses to widen, given the better seasonal factors ahead, while the revised salary scheme for civil servants and EPF account restructuring could benefit the unit’s target market. The food division may continue to face challenges due to FX control measures in Myanmar. Management plans to stimulate local demand for its products and is diversifying its supply chain away from Myanmar to mitigate the impact.

• Forecast and ESG. We toned down our margin assumptions for the food and restaurant divisions, while raising our forecasts for the polymer and industrial divisions. As a result, our FY24-26F forecast is revised down by 36- 13%. We maintain our SOP-based TP (includes 0% ESG premium/discount) after rolling over the valuation base year to FY25F, implying a blended 11.5x P/E. Key risks: Escalation of input costs, weaker-than-expected sales/orders.

Source: RHB Research - 3 May 2024