Highlights

• Company Background … Established in 1983, Engtex Group Bhd started as a hardware retail shop, which was solely involved in the wholesale and distribution of pipes, valves and fittings (PVF). To strengthen the Group’s revenue model, Engtex has expanded into manufacturing of water pipes, piling pipe and wi re mesh, property development and hospitality.

• Wholesale and Distribu tion … In FY14, wholesale and distribution had contributed for 62.6% and 60.3% of its revenue and EBITDA. The wholesale and distribution division distributes a wide range of hardware products that mainly selling PVF, steel products and engineering tools and machinery to more than 3,000 customers via its distribution network.

• Manufacturing … Manufacturing division had accounted 31.4% and 39.5% of Engtex’s FY14 revenue and EB ITDA. Engtex main manufacturing products are wire mesh (one of the top three largest wire mesh manufacturer in Malaysia), ductile iron pipes (currently one of only two Ductile Iron pipe manufacturers in Malaysia) and mild steel pipes (is one of the larger players with an estimated market share of 33%).

• Property development … Property development contributed 6% and 0.2% of its FY14 revenue and EBITDA. Engtex’ had 2 maiden property development projects in Selayang with combined Gross Development Value (GDV) of RM 306m.

Forecast

• We have forec asted Engtex’s earni ngs to grow by CA GR of 9.8% from FY14 to FY17 mainly due to increased demand for its water pipes driven by the upcoming 11th Malaysia Plan and Pipe Water Replacement project coupled with stable growth from wholesale and distribution on the back of growing number of infrastructure and construction activities.

• We expect Property Development to remain flattish as management had indicated that it is not part of the plan to expand its Property segment. Property Developments had only contributed 0.2-5% of Engtex’s EBITDA for the last 3 years.

• We have not incorporated any cont ributions from its Piling and Hospitality businesses as they are still on development stage.

Catalysts

• The upcoming 11th Malaysia Plan that will ramping up the demand for water pipes.

• Pipe replacement program that will provide the next earnings step-up for the group.

Risks

• Delay in major infrastructure projects.
• Delay in water takeover deal in Selangor.

Valuation

• We derived the value of Engtex at RM1.25 based on P/E multiple valuations, pegged to 7.0x P/E FY16 EPS of 17.7 sen/share, based in its historical 1-year forward P/E.

Source: Hong Leong Investment Bank Research - 20 Apr 2015