• Business profile: ENGTEX (listed in Aug 02) is one of the largest and leading integrated manufacturer and ‘one-stop’ distribution centre in Malaysia for pipes, valves, fittings (PVF), plumbing materials and steel products that specialize in total supply-chain solution provision for water supply, sewerage system, and construction industries.
• Its businesses are segregated into: 1) Wholesale and distribution (contributed 59% to FY14 revenue); 2) Manufacture division (contributed 36% to revenue) and 3) Property division (contributed 5% to revenue) with ongoing residential and commercial development projects in Selayang, and the launching of a new property development project in Kepong.
• 2015 outlook. Despite a 8% rise in 2014’s revenue to RM1.18bn, PBT decline 10% to RM64m, mainly due to market price competition of certain manufactured steel products and increase in operating expenses in its property development projects in Selayang and new property development project in Kepong coupled with a 53% jump in inventories written down totaled RM6.4m.
• ENGTEX is cautiously optimistic of 2015 as the property division is expected to contribute significantly from the completed and ongoing residential and commercial development projects in Selayang, and the launching of a new property development project in Kepong. Moreover, an amicable solution to the water impasse in Selangor could provide a boost to earnings, given the long overdue cement asbestos pipes replacement for over 6000km in Klang Valley. This, together with over 40,000km of aged cement asbestos pipes in Malaysia would provide strong growth potential to ENGTEX earnings in the medium to long term, as pipe-replacement stays high in the agenda amid Federal and Selangor governments’ renewed non-revenue water (NRW) reduction drive (likely be announced in 11th Malaysia Plan).
• Undemanding valuations. At RM1.02, ENGTEX is trading at 6.9x FY14 P/E, 20% below its 10-year historical average P/E of 8.6x and 59% below the sector’s 17x. We think such valuations have provided a sufficient margin of safety and cushion further share price decline.
• Ripe for a technical rebound. ENGTEX’s share price slid 29% from a 7-month high of RM1.43 (29 Sep 14) to a low of RM0.985 (31 Mar) before closing at RM1.02 yesterday. As daily technical indicators are slowly rebounding from oversold positions, ENGTEX’s share prices are likely to stage a technical rebound soon. A decisive breakout above RM1.07 (50-d SMA and 17 Mar high) will drive prices higher to RM1.11 (downtrend line from RM1.43). A decisive breakout above RM1.11 will spur prices higher towards our LT objective of RM1.20 (200-d SMA). Supports are RM0.985 and RM0.95 (50% FR). Cut loss below RM0.945.

Source: Hong Leong Investment Bank Research - 7 Apr 2015