Results Highlights

• Engtex’s 1Q2017 net profit jumped 22.1% Y.o.Y to RM17.9 mln, from RM14.7 mln a year ago, mainly due a RM7.1 mln gain from the disposal of a piece of land in the quarter under review. Meanwhile, revenue fell 2.9% Y.o.Y to RM253.8 mln vs. RM261.4 mln in 1Q2016.

• The reported earnings came in slightly above our forecasts – accounting to 27.6% our full year estimated net profit of RM64.7 mln, while the reported revenue fell short of our expectations, accounting to 20.8% of our FY17 revenue forecast of RM1169.2 mln. The earnings variance was mainly due to the aforementioned gain in disposal of a piece of vacant land in 1Q2017 and excluding the disposal gains, the results would have been below expectations.

• Segmentally, the group’s wholesale and distribution segment’s pretax profit declined 41.1% Y.o.Y to RM6.5 mln, due to softer demand amid the volatility in metal prices. The manufacturing segment’s pretax profit, however, jumped 64.1% Y.o.Y to RM18.6 mln due to a gain on disposal of an industrial land in Johor for RM7.1 mln. The property development segment pretax profit stood at RM1.0 mln vs. a pretax loss of RM0.9 mln in the previous year on contributions from its property development project in Kepong, while the hospitality segment incurred a pretax loss of RM1.5 mln, mainly from the startup cost.

• Meanwhile, the group’s net gearing as at 31st March 2017 improved slightly to 0.8x (from 0.9x), mainly boosted by proceeds from the disposal of the vacant industrial land in Johor.

Prospects

Following the capacity upgrade of Engtex’s Mild Steel (MS) pipe capacity from 44,000 tonnes per annum to 66,000 tonnes per annum, the utilisation rate of the MS pipes production stood at 42.8% in the 1Q2017. We expect the production rate to hit 50.0% by 2018, following potentially higher orders from existing projects such as the Langat 2 Water Treatment Plant, FELDA and Pengurusan Aset Air Bhd (PAAB).

Moving forward, Engtex’s current manufacturing orderbook of about RM175.0 mln will provide earnings visibility for the next 3-4 months. In the meantime, the group is also tendering for approximately RM340.0 mln worth of contracts located around in Malaysia and other ASEAN countries.

Hot-rolled coils prices continued to regain their footing since late November 2016, averaging US$602.01 (+18.6% Q.o.Q) per tonne in 1Q2017 (refer to appendix 1), mainly driven by the recovery in the infrastructure and construction backdrop, in-tandem with strengthening global economy.

Its property development segment has approximately RM180.0 mln worth of the total unbilled sales and unsold units, after RM10.0 mln was sold in the 1Q2017. Meanwhile, some 10 bumiputra units from Engtex’s Tiara Residence project were released for sale to the general public and are expected to be sold fully by this year. Earnings contribution, however, will be minimal compared to the group’s total earnings as most of its projects are already completed or is nearing the completion stage.

Valuation and Recommendation

As the results were above our estimates, we tweaked our earnings forecast for 2017 and 2018 by 7.3% and 5.6% to RM69.5 mln and RM87.0 mln respectively to account for the disposal gains.

We also maintain our HOLD recommendation on Engtex with a higher target price of RM1.40 (from RM1.30). Our target price is derived from ascribing a unchanged 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 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 - 1 Jun 2017