KUALA LUMPUR: RHB Research is optimistic about Synergy House Bhd's growth prospects, expecting the company to benefit from the Wayfair platform and potential setting up of a new recurring income stream by onboarding other local furniture manufacturers.
The firm, however, said potential FX hedging losses due to the appreciation of the US dollar-ringgit rate quarter-on-quarter could lead to a net loss for Synergy House in the second quarter of 2024 (2Q24).
RHB Research expressed confidence in Synergy House's execution, track record, and e-commerce capabilities, especially when compared to new market entrants, despite the temporary cost challenges.
"It has received positive inquiries from major furniture manufacturers to be boarded onto Wayfair US.
"Synergy House can receive a 10 per cent sales charge from these partnerships. Future developments, particularly in securing strategic partnerships, could prompt a re-evaluation of our target price to earning ratio and outlook," it said.
RHB Research forecasts lower profit margins for Synergy House in the second and third quarters of 2024 due to Wayfair's planned increase in promotional activity.
This decline in margins is expected to result from clearance sales of bedroom sets on the Wayfair US platform, most of which lack an anti-locking system.
The firm expects Synergy House to record a bad debt provision of US$2.9 million in the upcoming quarter, following Mellow River's recent acquisition of major client Hillsdale.
The firm also reduced its earning forecast for Synergy House for the financial years2024 to 2025 (FY24/FY25) by 19.8 per cent and 12.2 per cent respectively.
This is due to rising freight rates and higher-than-expected expansion costs.
"Post lowering our three-year earnings compounded annual growth rate to 29 per cent (from 39 per cent), we also trim our target P/E to 15 times from 25 times, and roll forward our valuation year to FY25."
RHB Research said although some freight costs have been hedged, container freight rates have more than tripled year-to-date.
This increase is exacerbated by delays in passing these costs onto end-customers in the business-to-consumer segment.
RHB Research maintained its "Buy" call on Synergy House, with a lower target price of RM1.36 from RM2.01.