Posted on 08 Aug 2017
Engtex Group Bhd is the largest distributor of non-oil and gas pipes, valves and fittings (PVF), plumbing materials, building and construction materials, general hardware products and steel-related products. With over 30 years of experience, Engtex has a wide distribution network around the country.
During the same period, Engtex also established itself as a dominant pipe manufacturer catering to the water and sewerage sectors. Engtex also ventured into production of wire mesh to cater for the construction and infrastructure sectors and is currently among the top three wire mesh manufacturers in Malaysia.
Being a leading integrated pipeline systems provider and supplier, Engtex is a beneficiary of nationwide piping projects from both the public and private sectors. Earnings growth would come from water and sewerage projects on the back of the ongoing expenditure on infrastructure undertaken by the federal government under the 11th Malaysia Plan and state governments.
Under the Langat 2 water treatment plant project, Engtex has secured RM127 million worth of piping contracts from Phases 1 and 2 and is looking to bid for more jobs from Phases 3 and 4.
The Selangor government announced its plan to build two water treatment plants with a combined cost of RM800 million to be completed by the end of the year and 2019 respectively.
Apart from the new piping projects, there is also the potential for pipe replacement in line with the government’s target to reduce non-revenue water to 25% by 2020 by replacing burst pipes.
Engtex’s order book currently stands at RM175 million to be delivered in three to four months. The company is bidding for another RM340 million worth of jobs from all around the country as well as the Asean region.
With the Amanja serviced apartments to be fully completed later this year, contributions of earnings from the property division are expected to be flat until the launches of new property projects. On the hospitality side, start-up costs of a third new hotel would weigh on the division’s earnings. However, we are not overly concerned as property and hospitality contribute only 3.7% of first quarter of financial year 2017 (1QFY17) revenue. The lion share of the group’s earnings is contributed by the manufacturing and wholesale and distribution arms that mainly cater for sectors such as water and sewerage, infrastructure and construction.
Overall, we expect FY17 and FY18 net profit to grow 5.3% and 18.7% on the back of revenue growth of 2.2% and 7.9% respectively.
Engtex has 133 million warrants which will expire in October. Conversion of the warrants could raise RM110 million to reduce borrowings, expand production and fund upcoming property development.
We are initiating coverage of Engtex with a “buy” call and a TP of RM1.60 based on FY18 forecast earnings per share with a forward price-earnings ratio of 10.2 times, based on the industry peer average. This translates into a potential upside of 26% against its current share price. — JF Apex Securities Research, Aug 7
