RHB IB Initiates Coverage For Synergy House At RM1.08 TP

RHB Investment Bank (RHB IB) initiated coverage of furniture designer and exporter Synergy House Bhd with the target price of RM1.08, 57% upside with 3% FY24F yield.

In its Malaysia Initiating Coverage note, the research house said the company stands out from other listed furniture players with its asset light model – focusing on design and primarily selling online, which is 80% of 9MFY23 sales.

“This spares it from high overhead costs and allows it to be versatile and quick in adapting to market changes. Synergy has evolved from a furniture manufacturer in 1990 into a pure-play furniture distributor that fully outsources manufacturing works.

“Thanks to its asset-light business model, operating in lower-cost Asian nations like Malaysia, the group can now channel all resources into design and development (D&D) – from 360 designs in 2019 to a whopping 2,500 as of December 2023.

“As Malaysia’s only cross-border e-commerce furniture distributor, Synergy has a foothold in the United States, the United Kingdom, and United Arab Emirates (UAE) via its ready-to-assemble (RTA) furniture exports. These are considered affordable fast-moving consumer goods (FMCG),” it said today (Jan 15).

The research house said with a FY24F return on equity (ROE) of 32%, it believes the company’s current valuation is compelling – it is trading at a low FY24F PEG ratio of 0.29x and at a steep discount to the peer average.

In June, Synergy House debuted on the ACE market, opening at 38 sen an 11.3% discount of its 43 sen share price.

RHB IB said the company’s business-to-consumer (B2C) sales outperformed its business-to-business (B2B) sales.

“In response to the furniture stock oversupply, the group stands out from peers by implementing product differentiation strategies across
various markets and platforms.

“As of 9M23, B2C sales grew to 43% of total sales compared to 25.6% in FY22. Around 80% of total B2C designs are generating healthy recurring monthly sales on reputable third-party e-commerce platforms.

“By mirroring its Wayfair US success in other platforms, the group’s higher-margin B2C sales is on track to reach 70% of total sales by 2025. Going forward, Synergy is setting B2C footprints in new markets, including Germany and France,” it said.

Besides that, the research house has adeptly steered over 80% of its customer base and total sales into the rapidly expanding e-commerce realm.

“This includes not only its B2C segment but also a significant portion of its B2B customers, with approximately 65% engaging in online furniture retail.

“The group’s focus on online sales is timely, as online furniture sales growth, with 2022-2028 compound annual growth rate (CAGR) of 12.6%, has recently surpassed traditional physical store sales growth.

“Major platforms like Wayfair and Amazon – where Synergy has a strong presence – dominate this sector, contributing significantly to the global market.

“The US, Synergy’s primary market, drives this growth with its high population, spending power, and digital infrastructure that is conducive to online shopping,” it said.

Coupled with its expansion plans, RHB IB said Synergy is forecasted to grow at a 3-year earnings CAGR of 38.1%.

“We peg a FY24F P/E of 15x to arrive at a RM1.08 TP.”

The key downside risks to its call include dependency on third-party manufacturers, absence of long-term contracts with B2B customers, competition risk, and high exposure to FX fluctuations.

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