Techbond Group Berhad, a manufacturer of water-based and hot melt indsutrial adhesvies, has set its sights on delivering a new better performance this year when its new vietnam factory start operating later this year.

I have been following Techbond since its IPO. Its share price has rallied from RM0.81 to RM1.40 ever since I covered the stock mid of last year. Assessing the latest development of the company, I am impressed by the vision of the management to expand its businss in an innovative way.

WHY is Techbond an attractive investment for value investors?

1) NET CASH COMPANY -  The company stocked up its raw materials when the first wave of Covid-19 hit the market globally during the first half of 2020. The management guided that they had enough raw materials for at least 6 months of its manufacturing. Its RM 47 million cash pile proves its value of good financial strength.

2) INNOVATION - The company announced its collaboration with Malaysian Palm Oil Board to explore on production of palm-based polyol, it solidified my view to favour the long term growth prospect of techbond. Techbond has been testing this new formulation on some of their end products. Their direction is to reduce formaldehyde emission to zero, which can be done using non-toxic palm oil-based industrial-grade adhesives.

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3) ESG Compliance -Techbond will be having first-mover advantage to make adhesive using palm oil. Although currently some players in the global market claimed that they can manufacture zero formaldehyde-based adhesives using petroleum polyol, but their cost is definitely much higher than palm oil based. Its key client base, the furniture companies are going towards green direction as well. With the market-changing innovation, Techbond could position themsleves to meet ESG compliance criteria in the future to make its company's valuation more attractive. (EPF mentioned its investment will go 100% ESG within next 10 years!

Target price of RM2.50  - With the expansion initiatives & strong track records by Techbond, we believe the profit driver from adhesive industry will continue to sustain in long term given their consistent revenue line from their strong customer relationship based on their past income records. Therefore, we are projecting a 3-year net profit CAGR of 22% to MYR 20 million in FY23, taking into account of low-cost business model & consistent demand in adhesive industry as well as its potential positioning to meet ESG requirements. With that, Techbond could be valued at RM 2.50 assuming a 25.5x PER on 2023F EPS. Although Techbond’s actual PER (x) are valued at 31x, but we would like to play the conservative card as we believe some of the potential upside may be factored by market participants. Techbond is moving towards a maturing stage beyond FY2023 where expansion uncertainty & industry pain will be factored in along.