Despite TECHBND's 1QFY25 results being impacted by forex headwinds, its fundamental business strength remains solid.

Excluding forex impact (with ~60% of revenue from overseas), we estimate revenue would have grown 9% YoY to an all-time high of RM40m. The expansion of its upstream polymer operations, coupled with the acquisition of new customers and recovery in the furniture industry are expected to contribute to a strong earnings trajectory. Recent price weakness is an accumulation opportunity as valuation is compelling, currently trading below 2SD of its 5-year historical FY25F PER mean. We maintain our forecasts, TP of RM0.54 with OUTPERFORM call.

Within expectation. TECHBND's 1QFY25 core net profit of RM4.2m came in at only 18% of full-year forecast. However, we deem the results within our expectation as we expect stronger quarters ahead underpinned by higher sales in the furniture and packaging segments driven by the onboarding of new customers.

YoY, its 1QFY25 revenue was flattish mainly supported by higher sales volumes for its adhesive and sealant products driven by new customers in the packaging sector as well as a shift to external sales of polymer products instead of internal consumption. Excluding forex impact (with ~60% of revenue from overseas), revenue would have grown 9% YoY to an all-time high of RM40m. Its core net profit grew steeper by 12% driven by a 2 ppts improvement in GP margin from a better product mix.

QoQ, crimped by the impact of forex, its 1QFY25 core net profit declined by 4%, resulting in a compression of the GP margin to 27% (from 28% in 4QFY24)

Outlook. TECHBND's earnings growth will be driven by: (i) increasing sales in furniture and packaging industry, (ii) synergies 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, and (iii) better utilisation rate at its upstream polymerisation plant.

The demand outlook for its products remains healthy, riding on the recovery of key industries, especially furniture and packaging, underpinned by restocking, new product launches by customers as well as penetrating new countries and customers. With the acquisition of MAC, TECHBND can now offer inner-tier adhesives for chipboard and particle board production expanding beyond its previous focus on surface-tier adhesives used in wooden joints and laminating. Typically, the furniture industry contributes to about ~60% of TECHBND's total sales. Additionally, MAC is also the sole global producer of microspheres which are tiny and hollow spheres used in the aerospace industry.

TECHBND has started supplying polymer (raw material of adhesive) to external customers while actively pursuing more clients. Previously, its polymer output was consumed internally. TECHBND strategically targets manufacturers of technical adhesive products, which allows the company to carve out a niche in the market, unlike many manufacturers in China whose focus is on generic products given the lack of technical expertise that TECHBND possesses.

Forecasts. Maintained.

Valuations. We maintain our TP of RM0.54 based on 13.5x fully-diluted FY26F EPS of 4.0 sen, in-line with the forward PER of 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 (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 Nov 2024