• Engtex’s 2Q2017 net profit slipped 34.5% Y.o.Y to RM13.6 mln, mainly due to slower demand for certain metal-related products amid the volatility in metal prices, whilst its hospitality division that was launched in 4Q2016 has yet to breakeven. Revenue for the quarter fell 4.2% Y.o.Y to RM284.7 mln, mainly on lower sales volume from the wholesale and distribution segment.

• For 1H2017, cumulative net profit declined 3.6% Y.o.Y to RM31.5 mln. Revenue for the period contracted 11.1% Y.o.Y to RM538.6 mln. The reported earnings came in slightly below our forecasts – accounting to 45.7% our full year estimated net profit of RM69.0 mln, while the reported revenue came within our expectations, accounting to 50.4% of our 2017 revenue forecast of RM1.07 bln.

• Segmentally, the group’s wholesale and distribution segment’s pretax profit decreased 21.9% Y.o.Y to RM19.6 mln due to softer demand amid the volatility in metal prices. The manufacturing segment’s pretax profit, however, grew 5.2% Y.o.Y to RM26.9 mln due to a gain on disposal of an industrial land in Johor for RM7.1 mln. The property development segment pretax profit jumped to RM0.7 mln vs. RM0.1 mln recorded in the previous corresponding period on contributions from its property development project in Kepong, while the hospitality segment incurred a pretax loss of RM2.7 mln.

• Meanwhile, the group’s net gearing, as at 30th June 2017, remained at unchanged at 0.8x – well within the management’s target of below 1.0x.

Valuation and Recommendation

Despite the reported results coming in slightly below our forecast, we leave our earnings estimates unchanged and we also maintain our HOLD recommendation on Engtex with an unchanged target price of RM1.40. We think that earnings should recover in 2H2017, owing to the stabilising metal prices, whilst demand should recover ahead of the commencement of several mega infrastructure projects. Our target price remains derived from ascribing a unchanged target PER of 8.0x to our fully diluted 2018 earnings forecast 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 - 24 Aug 2017