TEXCHEM: Strategic Shifts and Market Tailwinds Propel Positive Outlook

A recent investment bank research report highlights a positive outlook driven by strategic operational realignments and favorable market tailwinds. The firm has maintained its “BUY” recommendation, pointing to significant upside potential stemming from key business divisions.

Strategic Realignments in Food Division

The company is actively executing a strategic realignment within its food division, which includes the proposed disposal of a 34% stake in its subsidiary, Sea Master Food, for MYR14.9 million in cash. A substantial portion of these proceeds, specifically MYR10 million, is earmarked for reinvestment into a new food processing project in Thailand. This initiative, anticipated to be completed by end-FY25 through joint ventures with local partners, aims to diversify supply sources and lay a foundation for a turnaround, especially as the division recorded a PBT loss of MYR1.3 million in 1H25, primarily due to political instability and foreign exchange rate fluctuations in Myanmar.

Leveraging Growth in Polymer Engineering

A significant driver for the positive outlook is the robust performance projected for the polymer engineering division. This segment is well-positioned to capitalize on the tightening supply in the hard disk drive (HDD) market, a trend intensified by increasing AI-related storage demand and constrained production capacity. As a key supplier of plastic packaging to HDD customers, the division anticipates a substantial increase in sales. Furthermore, management foresees growing demand from the semiconductor sector, alongside emerging opportunities in medical and life sciences applications. Higher-margin projects currently underway, combined with others in the pipeline, are expected to significantly enhance the division’s profitability and operating leverage.

Performance Across Other Segments and Challenges

While growth in other segments may encounter some headwinds, overall performance is showing signs of bottoming out. In the restaurant segment, plans include menu updates and suburban expansion initiatives aimed at improving margins. A stronger Malaysian Ringgit could also contribute to reduced imported raw material costs. Conversely, the industrial division is expected to remain under pressure from intense Chinese price competition, with management’s focus on operational efficiency crucial for sustaining performance until market conditions improve.

Valuation and Outlook

The investment bank has maintained its earnings forecasts for FY25F-FY27F and reiterated its target price. Dividend assumptions have been revised to exclude special dividends, aligning with management’s guidance on the use of disposal proceeds. The current valuation reflects expectations of continued strategic execution and favorable market tailwinds. Key risks identified include weaker-than-expected sales or orders and fluctuations in chemical prices.