TECHBND has seen a pick-up in orders from the furniture industry. Via MAC, it has extended its market reach to upstream players in the furniture industry. Its upstream polymerisation plant in Vietnam has seen an improvement in utilisation. We raise our FY25F earnings forecast by 4%, lift our TP by 11% to RM0.50 (from RM0.45) and maintain our OUTPERFORM call.

We came away from a recent engagement with TECHBND feeling upbeat on its prospects. The key takeaways are as follows:

1. TECHBND has seen a pick-up in orders from the furniture industry underpinned by restocking, new product launches by customers as well as the on-boarding of new customers. Typically, the furniture industry contributes to about 40% of TECHBND’s total sales.

2. TECHBND, via MAC, has extended its market reach to upstream players in the furniture industry. To recap, TECHBND previously only focused on surface-tier adhesive products used in wooden joints and laminating wood and chipboard. With MAC coming on board, the group can now supply inner-tier adhesive products used in the production of chipboard, particle board, and paper carton packaging manufacturers, elevating itself to be a one-stop adhesive provider for the furniture industry.

3. Its upstream polymerisation plant in Vietnam has seen an improvement in utilisation to 50% (vs.30% 2QFY24). At present, about 30% of the polymer output is consumed internally, i.e. as feedstock for the production of adhesive products, with balance inevitably going to its competitors in the adhesive market. Tactically, TECHBND chooses to sell to adhesive product manufacturers not in direct competition in terms of product type and geographical market (for instance, China-based adhesive product manufacturer as TECHBND has no presence yet in China). Thus far, it has secured more than five customers and in negotiation with another ten, some of which are based in China. Depending on the response, TECHBND may double its production capacity.

Forecasts. We maintain our FY24F net profit forecast but raise our FY25F earnings by 4% to reflect higher demand for its adhesive and sealant products backed by the recovery in the furniture industry and an expanding customer base.

Valuations. We also raise our TP by 11% to RM0.50 (from RM0.45) based on 13.5x PER after rolling forward our valuation to CY25F fully diluted EPS of 3.7 sen from FY25F, in-line with the forward PER of its international peers such as H.B. Fuller Co, Henkel AG & Co and 3M Co. While the group is much smaller than benchmarked peers, we believe the PER valuation is justified given its forte in serving niche markets. There is no adjustment to our TP based on ESG given a 3- star rating as appraised by us (see Page 4).

Investment case. 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 - 5 Apr 2024