TECHBND’s 9MFY24 results disappointed as cost synergy from integration with Malaysian Adhesives and Chemicals (MAC) fell short. Nonetheless, its 9MFY24 core net profit more than tripled YoY driven by strong demand for its adhesive products and maiden contribution from MAC. We maintain our forecasts, TP of RM0.50 and OUTPERFORM call.

TECHBND’s 9MFY24 core net profit of RM12.6m disappointed, coming in at only 63% of our full-year forecast. The variance came largely from lower-than-expect cost synergy from integration with MAC. Consensus estimate is unavailable.

YoY, its 9MFY24 revenue jumped 50% driven largely by: (i) higher sales volumes for its adhesive and sealant products, we believe, due to a pick-up in orders from the furniture industry, and (ii) maiden contribution from newly acquired MAC. However, its core net profit more than tripled on a lower input cost and an improved product mix.

QoQ, its 3QFY24 core net profit dropped 26% on a 10% contraction in top line mainly due to lower productivity during the quarter on long festive holidays, coupled with higher input cost.

Outlook. TECHBND’s FY24 earnings growth will be driven by: (i) the first full-year contribution from MAC, and (ii) the synergy from MAC’s integration into its existing operations, both in terms of cost as well as the cross-selling of MAC’s products to its wider client network.

To recap, TECHBND’s existing products mainly cater to the timber panel, wooden furniture as well as fast-moving consumer goods (FMCG) sectors such as water-resistant sticky labels for beverage bottles and adhesives for carton packaging replacing plastic straps or cling film. On the other hand, MAC’s adhesive products are used further upstream, catering to the production of chipboard, particle board, and paper carton packaging. MAC is also the sole global producer of microspheres which are tiny and hollow spheres used in the aerospace industry.

Forecasts. We cut our FY24F earnings forecast by 15% to reflect lower cost synergy from the integration with MAC, while maintaining our FY25F numbers.

Valuations. However, we maintain our TP of RM0.50 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 the group 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. 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 - 28 May 2024