Pointers from RHB Research

Source: RHB Research 13 Feb 2019

1. Strong Track Record 

With >20 years of track record in the adhesives industry, we believe Techbond is capable of delivering resilient and sustainable earnings growth, thanks to its niche expertise and quality products. With hands-on management, innovative R&D, and efficient production, its net profit margin is outstanding at mid-teens level.

2. Sizeable Cash pile

Techbond had MYR26.8m in cash (MYR0.12 per share) as at end-1QFY19 (Jun), enabling it to be on the lookout for M&A opportunities. This could offer another leg of growth on top of aggressive capacity expansion that it is currently embarking on.

3. Strong bond with customers.

Techbond manufactures and supplies industrial adhesives to various industries. Approximately two-thirds of revenue is derived from the woodworking industry with most customers exporting furniture products to Europe and the US, markets which require stringent quality and safety standards. Hence, Techbond’s ability to obtain relevant compliance certification is essential in developing long-standing relationships with customers, whilst creating a barrier to entry for its competitors. 

4. Sticky demand

Apart from generic mass market products, Techbond also co-develops customised product solutions for their customers. We believe this results in lower risk of attrition as R&D could be a lengthy and involved process. In addition, adhesives typically account for a meagre 1-2% of total production cost for Techbond’s customers, hence would be less at risk in cost-down initiatives. Techbond has managed to grow its topline consistently (by 5-9%) and maintain a stable gross margin (c.30%) over the last three years, and we believe the trend will sustain over the longer-term.

5. Ambitious expansion plans in Malaysia and Vietnam

The group has earmarked c.MYR35m to expand production capacity in Malaysia and Vietnam, which we believe will be funded by IPO proceeds. Besides this, it is looking to venture upstream by producing polymers, one of the key raw materials for adhesives production. This will not only optimise its production cost but also open up a new revenue stream, and provide Techbond with more crossselling opportunities. The expansion drive augurs well for the group as it reflects management’s optimism on its long-term growth prospects.

6. Exciting earnings growth

We are projecting a 3-year net profit CAGR of 17% to MYR21.5m in FY21, taking into account capacity expansion and robust demand growth. Techbond could be valued at MYR1.28 assuming 15x P/E on 2020F EPS. We believe the stock deserves to trade at a premium over the Bursa Small Cap Index average of 9.4x, given its resilient business model, supported by steady earnings growth ahead, and a strong balance sheet. Note that players in the adhesive industry are trading at average P/Es of 17.4x (Figure 8).