PPB has acquired a 15% stake in TECHBND (OP; TP: RM0.50) for RM38m cash, having sold its adhesive unit Malayan Adhesives and Chemicals Sdn Bhd (MAC) to TECHBND in Feb 2023. The earnings impact of the deal to PPB is negligible. We see the deal as more of a vote of confidence from PPB to TECHBND. We maintain our forecasts, TP of RM17.50 and our OUTPERFORM call.

PPB has acquired 82.4m shares and 34.1m warrants in TECHBND translating to a 15% stake from TECHBND’s controlling shareholder Sonicbond Sdn Bhd (Sonicbond) for RM38m cash. PPB’s stake will remain around 15% upon full conversion of 246m outstanding warrants of TECHBND and PPB’s total cash outlay will rise to about RM49m. Sonicbond’s stake in TECHBND is now at 55% but will dip to 44% upon full conversion of 246m outstanding warrants.

The latest deal follows TECHBHD’s acquisition of a 99.57% stake in MAC from PPB from RM57m cash in Feb 2023. The acquisition has widened its wood-based coverage from furniture-maker to timber panels such as chipboards.

Today, 70% of TECHBND’s revenue is derived from exports to over 30 countries in Asia-Pacific, Europe, and Africa. While it started off serving the wood-based sector, it is now increasingly supplying to players in the fast-moving consumer goods (FMCG) space such as water-resistant sticky labels for beverage bottles, adhesives for cigarettes boxes as well as carton packaging solution to replace plastic straps.

Overall, TECHBND’s strength lies in its focus as an industrial adhesives and sealants solution provider. Emphasis on R&D allows it to develop most of its products in-house alongside eight proprietary brand names. TECHBND manufactures out of Malaysa (Shah Alam) and, since 2005, Vietnam (Binh Duong). To improve margins further, a polymerisation plant was added in Vietnam in 2021.

We believe PPB is getting a good deal here as it is earnings accretive and the 15% stake is acquired at below our TP per share of RM0.50 for TECHBND, based on 13.5x fully-diluted CY25F EPS of 3.7 sen, in-line with the forward PER of its international peers such as H.B. Fuller Co, Henkel AG & Co, and 3M Co. While TECHBND is much smaller than 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.

On the hand, TECHBND is getting a strong strategic partner with extensive regional operations including strong presence in China and India as well as a global network. PPB could easily fund the acquisition with its net cash of RM734m. We see the deal as more of a vote of confidence from PPB to TECHBND.

Forecasts. Maintained as earnings impact from the stake is negligible.

Valuations. Maintain TP at RM17.50 based on 16x FY25F PER, which is the average for larger capitalised integrated plantation PER minus a 15% holding company discount. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 3). At our TP of RM17.50, PPB trades at 0.9x FY24F PBV.

Investment case. We continue to like PPB’s strong business position in consumer essentials such as flour, feed, ready-to-eat products as well as mass entertainment in ASEAN while WIL provides exposure to China and India’s consumer markets. Maintain OUTPERFORM.

Risks to our call include: (i) weather impact on edible oil supply, (ii) unfavourable commodity prices fluctuations, and (iii) production cost inflation.

Source: Kenanga Research - 18 Jun 2024