KUALA LUMPUR: RHB research has initiated a "Buy" coverage on Malaysia's only cross-border e-commerce furniture distributor, Synergy House Bhd, for its assetlight model – focusing on design and primarily selling online.
About 80 per cent of its sales for the nine-month period in financial year 2023 was from online.
This spares it from high overhead costs and allows it to be versatile and quick in adapting to market changes.
"With a financial year 2024 forecast (FY24F) return on equity (ROE) of 32 per cent, we believe its current valuation is compelling – it is trading at a low FY24F PEG (price-to-earnings growth ratio) of 0.29 times and at a steep discount to the peer average." RHB research said in its note.
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 2,500 designs as of Dec 2023.
Synergy has a foothold in the US, the UK, and United Arab Emirates via its ready-to-assemble furniture exports. These are considered affordable fast-moving consumer goods.
In response to the furniture stock oversupply, the group stands out from peers by implementing product differentiation strategies across various markets and platforms.
For the nine-month period in 2023, business to consumer (B2C) sales grew to 43 per cent of total sales (FY22: 25.6 per cent).
Around 80 per cent 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 per cent of total sales by 2025.
Synergy is growing its B2C market to new markets, including Germany and France.
Synergy has adeptly steered over 80 per cent 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 busness to business (B2B) customers, with approximately 65 per cent engaging in online furniture retail.
The group's focus on online sales is timely, as online furniture sales growth (2022-2028 compound annual growth rate (CAGR) of 12.6 per cent) 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.
Key downside risks include dependency on third-party manufacturers, absence of long-term contracts with B2B customers, competition risk, and high exposure to foreign exchange fluctuations.
"Coupled with its expansion plans, Synergy is forecasted to grow at a three-year earnings CAGR of 38.1 per cent.
We peg a FY24F price to earnings of 15 times to arrive at a target price of RM1.08," the firm said.