In the last 6 months, Engtex Group Bhd has gained 31.5% to close at its 52-week high 82 sen on Jan 4. The counter is expected to continue its upward momentum to a near term resistance level of 92 sen. However, if you are a value investor, you may find Engtex to be overpriced given its current PE ratio of 157.6 times.

In addition, investors could be wary of its returns on capital employed (ROCE) with is at a low 3.4%, based on the trailing twelve months to September 2023 compared with the industry average of 5.6%. If you looking at its ROCE 5 years ago, it was at 9.3% and now it is just 3.4%.

The company has been putting in the more or less the same capital employed in the business over the years but returns have been declining. This indicates that it is operating in a mature industry with intense pressure on its margins due to the competitive industry despite it holding a competitive advantage in large diameter pipe manufacturing.

Engtex is a steel products manufacturer, mainly making steel and ductile iron pipes and fittings, valves, hydrants, industrial casting products catering to the water sector. It also has property development business and hospitality involving the company's hotel business.

Steel products are however Engtex’s main stay and analysts favour the counter compared with steel players.

Analysts see a bright spot in local steel product makers which prospects are buoyed by several factors. Firstly, is the revitalisation of the local construction sector and the impending roll-out of mega public infrastructure projects (including water projects). There is also the reduced volatility in the cost of steel input which brings about better margin and earnings stability.

One of the key catalysts for the water sector is the proposed water tariff hike. The proposed water tariff increase awaits Cabinet approval for implementation this year.

This paves the way for larger and more structured capex allocations for pipe replacements beyond the annual RM1 billionn from Pengurusan Aset Air Berhad. If the tariff hikes materialise, it would speed up water infrastructure upgrade projects.

Engtex, as one of the few domestic players capable of producing larger diameter ductile iron and mild steel pipes, as well as a supplier of other construction materials (e.g. wire mesh, steel bars), should be a key beneficiary.

On the other hand, there could be further delays in water tariff hikes as the government does not want to cause unnecessary burden to the people. Due to uncertainties in the economy, there could be slower rollout of construction projects while significant volatility in metal prices, could negatively impact Engtex’s earnings growth.

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Here are the setup based on Daily Chart:

1. Strong uptrend with several healthy pullback

2. No weakness so far, may have any round of pullback to 20MA