INVESTOR interest has picked up in Texchem Resources Bhd since the diversified group divested a 28% stake in its Sushi King restaurant chain for RM102.2 million cash.

The stock jumped from around RM1.30 in late February, after the deal was completed, to as high as RM1.72 on March 18. It closed at RM1.65 last Thursday, for a market capitalisation of RM204.76 million.

In fact, the stock has doubled in value from its 80-sen level last November when the Sushi King deal was first announced.

The sale of the Sushi King stake to Japanese-controlled Asia Yoshinoya International Sdn Bhd has unlocked value for Texchem. Apart from raising RM102.2 million, the deal values its remaining 70.35% stake in Sushi King at RM257 million.

That has attracted investors to the growth potential of Texchem’s restaurant business, which includes other Japanese restaurant brands like Goku Raku Ramen, Miraku, Waku Waku, Yoshinoya, Hanamaru and, most recently, Tim Ho Wan – a Hong Kong-based Michelin starred restaurant.

According to Texchem (fundamental: 0.75; valuation: 2) , management is planning to launch 13 new Sushi King outlets — from 89 now — and a third Tim Ho Wan by year-end. By 2020, it is targeting 100 outlets each for Yoshinoya and Hanamaru.

“We expect to see 20% to 25% growth in [the restaurant segment] revenue in five years,” says Texchem’s founder and executive chairman Tan Sri Fumihiko Konishi. The group has budgeted some RM20 million in capital expenditure this year on the restaurant division, he tells The Edge.

The restaurant operation has been Texchem’s biggest profit contributor, raking in RM15.31 million in pre-tax profit (PBT) in the financial year ended Dec 31, 2014, on revenue of RM206.02 million. However, the other business divisions have not been performing satisfactorily.

The industrial segment, which provides a wide array of resins, additives and chemicals as well as chemical and microbiological testing, recorded a PBT of RM5.42 million in FY2014, while the food division — which produces surimi, sashimi, fishmeal and other seafood — contributed RM1.89 million. Polymer engineering and other segments posted pre-tax losses of RM18.76 million in total.

Losses at the polymer engineering division saw  Texchem post an overall net profit of only RM1.3 million or 1.04 sen per share in FY2014, on revenue of RM1.02 billion. About 40% of the revenue came from the industrial division, which, however, has thin profit margins.

The numbers were better in the first quarter of 2015, with the group posting a net profit of RM4.99 million on revenue of RM277.09 million, due to improved performance at the industrial and polymer engineering divisions.

Asked whether there is any intention of hiving off the underperforming units or demerging the restaurant business to list on its own, Konishi says he has no intention to do so and has faith in the group’s existing businesses.

“It took us the past six years to restructure the polymer engineering division [after it was badly hit by the 2008 financial crisis]. It was originally targeting the electronics sector, but now we are focusing on serving the medical device and life sciences industries,” says Konishi, who is a long-time resident of Penang.

He hopes the division will ride the rapidly growing medical device industry in Malaysia and Singapore, and shares that German-based B. Braun Medical and Terumo Medical Corp in Japan are some of the big names Texchem will be working with.

The polymer engineering division remained in the red in the first quarter, incurring a loss before tax of RM1.57 million, narrowing from a pre-tax loss of RM4.01 million in 1QFY2014, due to higher margins.

“Fortunately, we have other profit-making units to support the polymer engineering division. I believe it will recover quite rapidly hereafter. I think it is reasonable to target a profit of RM3 million in 2016, and then RM8 million in 2017,” says Konishi, who foresees the division’s revenue growing 10% per annum over the next five years.

On the industrial division, he says the business is very steady but margins have got thinner due to increased competition over the years. The business, he says, has been enjoying 5% to 7% growth per annum and will continue to grow steadily with the company’s move into high-tech chemicals that command better margins.

As for the food division, Texchem is aiming to double its soft shell crab capacity in Myanmar within five years to 1,600 tonnes a year. It will spend about RM25 million on new facilities.

For the current year, Konishi is expecting the food division’s contribution to improve significantly on the back of more favourable foreign exchange, the removal of export tax in Myanmar and lower crude oil prices.

Texchem’s valuation, at its current market capitalisation of almost RM205 million, could be justified if it can sustain or better its 1QFY2015 earnings of RM4.99 million in the remaining quarters. On an annualised basis, the group could net about RM20 million, giving it a price-earnings ratio of about 10 times.

Other positive factors include its 70.35% stake in the Sushi King chain valued at RM257 million. The group also sits on RM151.35 million worth of cash and investment properties held for sale, while its 73.8% owned subsidiary Texchem Corp Sdn Bhd (TexCorp) owns 24.15  million shares, or a 19.46% stake, in Texchem, worth about RM40 million. On the other side of the balance sheet, total loans amounted to RM208.18 million as at March 31, 2015.

According to Konishi, TexCorp plans to place out the 19.46% equity interest it currently holds in parent Texchem within the year.

“We are in talks with potential investors from Japan and Malaysia and hopefully, we can complete it this year,” he says.

Last Tuesday, Texchem announced to Bursa Malaysia that it had been granted a second extension of 12 months by the Penang High Court for TexCorp to dispose of its shares in the listed entity. The previous deadline of May 16 this year was extended to May 16, 2016.

The present shareholding structure is in contravention of Section 17 of the Companies Act 1965 since TexCorp was made a subsidiary of Texchem in May 2013. Until TexCorp sells its 19.46% stake in Texchem, it has no voting rights in the parent company.

Note: The Edge Research’s fundamental score reflects a company’s profitability and balance sheet strength, calculated based on historical numbers. The valuation score determines if a stock is attractively valued or not, also based on historical numbers. A score of 3 suggests strong fundamentals and attractive valuations. Visit www.theedgemarkets.com for more details on a company’s financial dashboard.

This article first appeared in The Edge Malaysia Weekly, on May 18 - 24, 2015.

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