TECHBND’s 9MFY23 results met our forecast. Its strong top line performance was negated by costs incurred in relation to the recent acquisition of Malaysian Adhesives and Chemicals (MAC). Looking forward, we expect its earnings growth to be driven by the full integration of MAC into the group. We maintain our forecasts, TP of RM0.45 and OUTPERFORM call.

Within expectations. TECHBND’s 9MFY23 core net profit came in at only 57% of our full-year forecast. However, we deem the number as within our expectation as it included lumpy one-off costs incurred in relation to the recent acquisition of MAC. We expect a significantly stronger 4QFY23 in the absence of additional one-off costs.

YoY. 9MFY23 revenue grew 23% as the group saw renewed demand for its adhesive products with the lifting of pandemic restrictions. Sales of adhesives continued to contribute the lion’s share of revenue, growing 24% YoY. Revenue from supporting services also grew by 16.7%, but overall contributions remained relatively small at only 5%. However, the group’s EBIT fell 13% YoY following a sharp rise in administrative costs stemming from its recent acquisition of MAC.

Overall, net profits fell 15% as the increased administrative costs offset the growth in top line.

QoQ. 3QFY23 revenue grew 7% following a minor uptick in sales volume. The group also returned to profitability during 3QFY23, reporting net profit of RM2.9m vs. loss of RM1.7m previously. The QoQ swing was largely due to the recognition of unrealised foreign exchange losses during 2QFY23 which resulted in significantly weaker earnings. The group also commented that it enjoyed improvements in economies of scale during 3QFY23 which also partially contributed to the earnings improvement.

Looking forward. Despite the remainder of FY23 looking to be a bumpy road for the group, we continue to be positive on its medium-term prospects following the recent MAC acquisition. In the near-term, higher administrative costs and the integration of MAC will put a damper on earnings growth. Once it shed these costs and MAC is fully operational, we expect earnings to pick up again as the group begins to enjoy some of the synergy afforded by the acquisition, allowing it to expand into new segments and grow its revenue base. However, we do remain slightly wary of the recent slowdown in the furniture sector. While the group has reported healthy revenue growth thus far, an extended downturn in the furniture sector could prove to be a headwind.

Forecasts. Maintained.

We also maintain our fully diluted TP of RM0.45 based on 13.5x CY24 PER, in-line with its international peers’ forward average. While the group is much smaller than the benchmarked peers, we believe the PER valuation is justified given the specialised nature of its business and exposure to niche markets that have less competition. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 3).

We continue to like TECHBOND for: i) customer-centric, solution-provider and manufacturer model, (ii) strong customer base across both consumer and woodworking sectors, and (iii) its growing presence in upstream and midstream operations through MAC. Maintain OUTPERFORM.

Key risks to our call include: (i) an extended downturn in the furniture sector, (ii) unfavourable foreign exchange movements, and (iii) lower-than expected production levels from both the core group and MAC.

Source: Kenanga Research - 25 May 2023