Expect To See Flattish-To-Softer QoQ Earnings Growth For Texchem Resources, Says RHB IB

photo credit: Texchem Resources

Texchem Resources is expected to announce its 4Q22 and FY22 results on 23 February. In its Malaysian Company Result Preview, RHB Research stated that it expects 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 – according to the research house, this counter is cheap, in view of its well-established and diverse businesses, strong cash flow generation, and c.8% FY23F yield.

The 4Q22 sales volume of its polymer engineering unit is expected to be soft, due to the sharp deterioration in demand for hard disk drives (HDD). That said, RHB Research’s recent industry checks indicate that major HDD makers are guiding for QoQ growth for 1Q23. It expects 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, Texchem has 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. The research house expects Texchem to chart a better performance ahead, as the group continues to penetrate into key major accounts and expand its specialty product portfolio.

Hence, the research house has cut its forecast earnings of financial year 2022-2024 (FY22-24F) by 16.3%, 19.5%, and 17.1% after factoring in lower sales volume assumptions for the polymer engineering and food businesses.

As a result of that, its SOP-derived target price (TP) drops to MYR3.67 (after applying a 20% conglomerate discount and 2% ESG premium), implying a blended 11.4x FY23F P/E. However, it should be noted that Texchem’s valuation remains undemanding, in light of its sustainable
turnaround in profitability, diverse businesses, and handsome yield of 8%.

Key downside risks identified include escalation of input costs, weaker-than-expected sales/orders, fluctuation of chemical prices, credit risks, and unfavourable FX rates.

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