We initiate coverage on TECHBND with an OUTPERFORM call and a TP of RM0.45 based on 13.5x its FD CY24F EPS of 3.4 sen, in-line with international peers in the adhesive sector. We like TECHBND for its: (i) customer-centric, solution-provider and manufacturer model, (ii) strong customer base across both consumer and woodworking sectors, and (iii) diverse and growing presence in South-East Asia, strengthened by the integration of its upstream and midstream operations, and recent expansion with the acquisition of Malaysian Adhesives and Chemicals (MAC) from PPB (OP; TP: RM19.30).

A unique customer-centric manufacturing business model. TECHBND is a B2B adhesives solution provider, offering specialised products researched, designed and tested in-house to meet specific customer requirements. The group caters mainly to the timber panel, wooden furniture sectors as well as fast-moving consumer goods (FMCG) sector such as water-resistant sticky labels for beverage bottles and adhesives for carton packaging which are replacing plastic straps or cling film. Its markets by size order are Vietnam, Malaysia, and Indonesia.

Loyal existing customer base. TECHBND caters to multinational, local, and regional, furniture players, and enjoys strong customer retention given its proprietary adhesive blends. Additionally, with an internal R&D department, the group is able to produce adhesives to the specifications of its customers, conducting rigorous testing and providing supporting data to demonstrate products effectiveness. Premium charges are justified for the increased effectiveness, often resulting in savings for customers through superior application or adhesive performance. In collaboration with the Malaysian Palm Oil Board (MPOB), TECHBND is looking to offer premium solutions to customers seeking environmentally-friendly adhesives.

Synergistic expansion from the acquisition of MAC. The group’s recent acquisition of MAC provides the opportunity to penetrate into new segments. MAC’s adhesive products are used further upstream, catering to the production of chipboard, particle board, and paper carton packaging. The group is now aiming to leverage its market expertise and existing client network to increase MAC’s market share in the space.

New upstream presence in polymerisation. Its new polymerisation plant in Vietnam produces polymers used as input for adhesive production. The plant has begun producing raw materials for internal consumption but it is targeting other adhesive manufacturers in niches or markets that TECHBND has no presence yet, i.e. China.

Initiate coverage with OUTPERFORM rating and a TP of RM0.45 based on 13.5x PER on its fully-diluted CY24F EPS of 3.4 sen, in-line with its international peers’ forward average. While the group is much smaller than benchmarked listed peers, we believe the PER is justified given the specialised nature of its business and exposure to niche markets with less competition. Coupled with strong expected earnings growth following the normalisation of its profits across the core group as well as MAC, we believe the earnings prospects provide a basis for the higher multiple despite its smaller size. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 7).

Risks to our call include: (i) extended downturn in the furniture sector, (ii) lower-than-expected production, and (iii) foreign exchange translation risk.

Source: Kenanga Research - 17 Apr 2023