• Stable earnings growth. HLIB forecas ted Engtex’s earnings to grow by CAGR of 9.9% 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.
• In 1Q15 results review, Management also said its property division is expected to contribute significantly from the completed and ongoing residential and commercial development projects in Selayang, and the new property development project in Kepong.
• Tremendous opportunity from pipe replacement program. 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.
• Undemanding valuations. At RM1.09, ENGTEX is trading at 5.9x FY16 P/E, 29% below its 10-year historical average P/E of 8.3x. We think such valuations have provided a sufficient margin of safety and cushion further share price decline.
• Yesterday, theedgemarkets.com reported that a new supplementary water agreement is expected to be signed between the Selangor and federal governments in the near term, after both the federal and state governments had agreed last month to end the water impasse in two months. Following the news, ENGTEX prices gained 2.8% and closed above the downtrend line as well as its 10-d/20-d/30-d/50-d/100-d SMAs on the back of heavy volume of 3.1m shares yesterday (181% higher against 1M average). This breakout is positive and could send prices higher in coming days.
• In spite of the plunge in share price from a peak of RM1.43 (29 Sep 2014) to recent low of RM0.975 (7 May), ENGTEX share price has slowly formed a “Positive Divergence” pattern, indicating a possible reversal of retracement and points to upward trajectory from oversold position.
• Noticeably, daily oscillators (RSI, MACD and Slow Stochastics) show that share price is bottoming up amid strong buying strength. Further upsides are targeted at RM1.14 (200-d SMA) and RM1.20 (50% FR), with a long-term objective of RM1.26 (61.8% FR). Supports are pegged at RM1.05 (100-d SMA) and RM1.01 (lower Bollinger band). Cut loss below RM0.99.

Source: Hong Leong Investment Bank Research - 25 Jun 2015