Results Highlights

• Engtex’s 4Q2016 net profit jumped 13.6x Y.o.Y to RM13.7 mln, lifted by higher average selling prices (ASP), coupled with stronger contribution from its property development project in Kepong. Revenue for the quarter, however, contracted 10.4% Y.o.Y to RM264.1 mln, dragged down by the lower demand for certain metal and steel products.

• For 2016, cumulative net profit climbed 50.2% Y.o.Y to RM60.6 mln. Revenue for the period, however, declined 7.5% Y.o.Y to RM1.07 bln. Both the reported earnings and revenue came within our estimates as its net profit accounted to 98.1% of our full year net profit forecast of RM61.8 mln, while its revenue amounted to 103.2% of our revenue forecast of RM1.04 bln for 2016.

• Segmentally, the group’s wholesale and distribution segment’s pretax profit grew 4.7% Y.o.Y to RM41.9 mln, owing to the favourable ASPs. The manufacturing segment’s pretax profit gained 65.4% Y.o.Y to RM41.9 mln on higher effective utilisation of raw materials. The property development segment pretax profit stood at RM3.9 mln vs. a pretax loss of RM4.3 mln in the previous year on higher contribution from its property development project in Selayang, while the hospitality segment incurred a pretax loss of RM2.4 mln, mainly from the startup cost.

• Meanwhile, the group’s net gearing, as at 31st December 2016, was relatively unchanged at 0.9x as the increase in cash level was offset by the rise in short-term borrowings.

Prospects

The restructuring of the country’s water assets remained unresolved. Nevertheless, measures have been taken to accelerate the deal after the Federal Government will appoint an international valuer to independently evaluate a fair and best offer for all parties. The delay is also seeing a lower take up rate for its pipes as the nationwide pipe replacement efforts are also seeing slow progress. .

In the meantime, Engtex has completed its Mild Steel (MS) pipe capacity upgrade from 44,000 metric tonnes per annum to 66,000 metric tonnes per annum in 4Q2016. This is to facilitate the potentially higher demand of MS pipes from existing projects such as Langat 2 Water Treatment Plant, FELDA and Pengurusan Aset Air Bhdd (PAAB). Already, the aforementioned pipeline plant is operating at 80% utilisation prior to the upgrade.

Going forward, Engtex’s current manufacturing orderbook of approximately RM150.0 mln will sustain its manufacturing segment’s earnings over the next 3-4 months. We note that the group is also tendering for approximately RM450.0 mln worth of supply contracts from both the public and private sectors.

Hot-rolled coils prices have also found stability and recovered since late November 2016, averaging US$525.90 (-9.7% Q.o.Q) per tonne in 4Q2016 (refer to appendix 1). The said recovery came amid Donald Trump’s election promise to revitalise U.S.’ aging roads, bridges, railways as well as airports and this has ramped up demand for raw materials such as cement and steel which saw both the prices trending higher.

On the property development segment, its unbilled sales and unsold units of approximately RM200.0 mln will continue to see minimal contribution to the group’s total earnings as most of its projects are already completed and some of the bumiputra units are pending release for sale to the general public.

Valuation And Recommendation

As the reported earnings within our estimates, we leave our earnings forecast unchanged and we maintain our HOLD recommendation on Engtex with an unchanged target price at RM1.30.

Our target price is derived from ascribing a target PER of 8.0x to our fully diluted 2017 forecast earnings of its manufacturing and wholesale and distribution businesses, in line with its historical PER. Its property development segment’s valuation, meanwhile, remains unchanged at 0.6x its BV due to its relatively small-scale property development projects.

Risks to our recommendation and target price include the continuous steel dumping activities from China that could cause price competition among local steel players and potentially leading to further margin compression. Further cooling measures to curb the property sector and tightening of monetary policies imposed by the Government will be unfavourable to its property development segment.

Source: Mplus Research - 27 Feb 2017