Results Highlights

• Engtex’s 4Q2017 net profit decreased 11.6% Y.o.Y to RM12.1 mln, dragged down by lower demand for certain metal products in light of the volatility in metal price, whilst the hospitality segment is still in the red. Revenue for the quarter, however, added 17.3% Y.o.Y to RM309.7 mln.

• For 2017, cumulative net profit declined 8.0% Y.o.Y to RM54.4 mln. Revenue for the year, however, climbed 3.2% Y.o.Y to RM1.11 bln. Both the reported earnings and revenue came within expectations – accounting to 97.0% and 103.2% our full year estimated net profit and revenue of RM56.2 mln and RM1.07 bln respectively.

• Segmentally, the group’s wholesale and distribution segment’s pretax profit decreased 13.8% Y.o.Y to RM38.7 mln amid the sluggish demand in certain metal related products due to the volatile metal prices. The manufacturing segment’s pretax profit, however, grew 12.2% Y.o.Y to RM47.0 mln, lifted by an increase in mild steel concrete-lined pipes and certain steel products.

• The property development segment’s pretax profit stood at RM3.7 mln, anchored by billings from the Amanja project at Kepong, whilst the hospitality division remains in the red (pretax loss of RM5.2 mln) after a year’s operation due to aggressive promotional rates offered.

• Meanwhile, the group’s net gearing as at 31st December 2017 improved to 0.6x (from 0.7x in 3Q2017). Moving forward, Engtex will continue to pare down its gearing to 0.5x via the utilisation of proceeds from the conversion of its 148.5 mln WarrantsA.

Prospects

The High Court has dismissed a RM14.0 bln suit filed by Puncak Niaga Holdings Bhd (Puncak Niaga) against former Selangor Mentri Besar Tan Sri Abdul Khalid Ibrahim over the restructuring of the state’s water industry. With no resolution in place and in the event the related parties fail to reach an agreement over the deal by 4th July 2018, the government will invoke the Water Services Industry Act (WSIA) 2006 to force the takeover of the water services industry in Selangor. A resolution to the ownership of Selangor’s water supplies will pave the way for the delayed but much needed pipe replacement undertaking to address the high levels of Non-Revenue Water nationwide. The pipe replacement project will be beneficial to Engtex as it ranks among the top pipemaker in the country.

Engtex’s manufacturing orderbook of approximately RM300.0 mln will continue to provide earnings visibility over the next quarter. Meanwhile, the group’s two new plants; a new steel pipe plant in Kuantan, Pahang and steel mill plant in Merlimau, Melaka will be operational in 2Q2018. We reckon that Engtex is position as one of the beneficiaries under Budget 2018’s allocation of RM1.40 bln to reduce non-revenue water programme across the country.

Hot-rolled coil prices continues to be range bound, averaging at US$615.87 (-1.1% Q.o.Q) in 4Q2017. Nevertheless, the aforementioned commodity prices have surged to its highest level since 2011 in 2018, boosted by capacity cuts and strong demand from major construction and automobile industries. Meanwhile, wire rod prices continue to trend higher, rising 10.5% Q.o.Q to an average of US$707.29 per tonne in 4Q2017.

Its property development segment with unbilled sales of RM18.3 mln will provide earnings visibility over the next two years. Meanwhile, the group’s three projects under the hospitality division could remain in the red in view of the stiff competitive room rates across various hotels that offer similar facilities.

Valuation and Recommendation

There is no change to our earnings estimates for 2018 after the reported earnings came in line with expectations and we maintain our BUY recommendation on Engtex with an unchanged target price of RM1.30.

Our target price was derived from ascribing a unchanged target PER of 8.0x to our 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 - 28 Feb 2018