• A leading one-stop pipeline system provider. Established in 1983, Engtex started as a hardware retail shop, which was solely involved in the wholesale and distribution of pipes, valves and fittings (PVF). To strengthen its revenue model, Engtex expanded into manufacturing of water pipes, piling pipes and wire mesh, as well as property development and hospitality businesses.

• Wholesale and Distribution. In FY16, wholesale and distribution division contributed 50% and 48% of its revenue and EBITDA. This 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 (i.e. stockists, dealers, resellers, retailers, hardware stores, industrial buyers, contractors and end-users) via its distribution network for the properties, utilities, waterworks, infrastructure and construction sectors.

• Manufacturing. This division accounted for 47% and 49% of Engtex’s FY16 revenue and EBITDA. Its main product portfolios are: 1) Ductile iron (DI) pipes (mainly used in water & sewerage sectors): Engtex is the major player in the duopolistic DI pipe sector in Malaysia (the other competitor is YLI) with operating plant located in Gebeng, Kuantan (capacity 60k MT producing pipes up to 800mm in diameter). DI pipe has been recognised as the superior pipe material for water and sewerage as it provides excellent resistance to impact, pressure and corrosion; 2) Mild steel (MS) cement-lined pipes: (mainly used in water & sewerage sectors): Its operating plants are located in Serendah, Selangor (capacity 66k MT producing pipes up to 3000mm in diameter); 3) Wire mesh (mainly used for construction and infrastructure). Its operating plants are located in Ijok, Seberang Prai, Bukit Minyak, Gebeng, JB and Kota Kinabalu (capacity 210k MT). At present, Engtex is one of the top three largest wire mesh manufacturer in Malaysia.
   
• Property development. This division only contributed 3.3% and 3% of its FY16 revenue and EBITDA. Engtex’ first maiden property development project, Tiara Residence (RM84m GDV) and Emerald Avenue (GDV RM222m), Selayang had been completed. Its ongoing project is Amanja service residence development at Kepong (RM170m GDV) with targeted completion in 2018 (unbilled sales: RM40m; unsold stock: RM151m).
   
• Brighter outlook for FY17. Engtex’s earnings growth is likely to gain traction in 2017, mainly driven by its Wholesale and Distribution and Manufacturing divisions. Following a dip in sales, Wholesale and Distribution division is envisaged to see upturn in 2017 , aided by resumption of project implementation of infrastructure and property development activities. Its Manufacturing division is also likely to feature sustained growth arising from the strong underlying demand growth from the waterworks, infrastructure and construction activities on favourable product mix and better margins riding on the recovery of steel prices.
   
• Poised for a triangle breakout. At RM1.26, Engtex is trading at undemanding valuations of 9.5x FY16 P/E on a fully diluted basis (29% discount to its peers: 13.3x) and 0.72x P/B (10% below its 10-year historical average 0.8x), supported by steady underlying demand growth from the waterworks, infrastructure and construction activities.
   
• Following a 19% correction from 52-week high of RM1.37 (22 Aug) to a low of RM1.11 (30 Nov), Engtex share prices had staged a commendable rebound above the support trendline (near RM1.23) and 200-d SMA to end at RM1.26 yesterday. We see a potential triangle breakout taking form here as technicals are on the mend. A decisive breakout above RM1.33 could potentially signal that the next leg up towards RM1.38 and RM1.47 levels (LT objective: weekly chart) in the medium to long term. Key supports are RM1.23 and RM1.20 (15-20 Feb low). Cut loss at RM1.18.

Source: Hong Leong Investment Bank Research - 8 May 2017