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Author: MalaccaSecurities   |   Latest post: Thu, 18 Jul 2019, 9:24 AM

 

Engtex Group Bhd - Ceasing Coverage - Underwhelming Prospects

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Prospects

  • Engtex’s outlook remains clouded by uncertainties over its under-utilised capacity in both the mild steel (MS) and ductile iron (DI) pipes production that was running at 48.5% and 22.4% respectively in 2018. In the meantime, its steel welded mesh and hard drawn wire plants that have a combined capacity of 210,000 tonnes per annum is operating at 44.4% in 2018. The volatility of steel prices, partly arising from the intensifying Sino-U.S. trade dispute also does not bode well for the group as demand stalled after buyers continue to adopt the wait-and-see approach.
  • Elsewhere, we reckon that both its property development and hospitality segments will remain in the red in 2019 and 2020 on the prolonged slump in the property development market, coupled with the competitive hotel room rates from demand for rental platforms such as Airbnb, Booking.com and HomeAway. In the absence of new catalysts and the difficult operating environment that is expected to prolong, we are ceasing our coverage on Engtex. Our last recommendation was a Sell.
  • We expect Engtex’s earnings to deteriorate by 54.1% Y.o.Y to RM6.0 mln in 2019 before bottoming out and recover 110.0% Y.o.Y to RM12.7 mln in 2020, helped by the possible stabilisation of steel prices, coupled with the resumption of works on certain mega infrastructure projects. However, we don’t see a significant boost from non-revenue water (NRW) pipe replacement programmes currently undertaken by eight states in Malaysia due to the constraints in the government’s coffers.
  • Our last assigned target price was RM0.48, arrived by ascribing a target PER of 8.0x to its manufacturing and wholesale & distribution businesses. Its hospitality segment earnings is pegged to a PER of 6.0x to its 2019 earnings due to its smaller contribution to the group, while its property development segment’s is valued at 0.6x its BV due to its relatively small-scale property development projects.

Source: Mplus Research - 14 Jun 2019

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