• 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. In general, the wholesale and distribution division contributes about 50% to revenue whilst the balance is derived from the manufacturing (47%) and property & hospitality segments (3%).

• Investment merits. We like Engtex due to its 1) one-stop solution provider in building materials with strong distribution network (covering ~5000 items and ~3000 dealers); 2) far-sighted management team with expertise in water pipe manufacturing, primary beneficiary from mega water infrastructure projects (Phase 3 and 4 of the Langat 2 water treatment plant as well as nationwide pipe replacement projects to reduce non-revenue water); 3) Potential higher dividends in future as net gearing is expected to fall towards 0.5x with retirement of borrowings from the ~RM110m proceeds from warrants conversion (expired in Oct 2017). In addition, the management has the intention to further pare down its debts by unlocking the value of its properties and landbanks; 4) A good defensive play with strong FY17-19 earnings growth of 16% in anticipation of more mega infrastructure and water-related works (post GE14) as well as declining financing cost; 5) In addition, the newly set-up Electric Resistance Welded Pipe plant and steel rolling mill should start contributing to the earnings in 2H18, complementing and widening Engtex’s products mix.

• Pending a sideways consolidation breakout. Engtex’s share price is likely to trade sideways within the RM1.07-1.14 levels in the near term after the recent bullish downtrend line breakout. The bulls are likely to back in charge should the immediate neckline resistance at RM1.14 is taken out decisively. A decisive break above RM1.14 would spur prices higher towards RM1.17 (23.6% FR) and RM1.24 (38.2% FR) before reaching our LT target at RM1.29 (50% FR).

• On the flipside, downside risks are cushioned by undemanding valuation of 7.8x FY18 P/E and 0.77x P/B, supported by 16% FY17-19 EPS CAGR and decent yield of 3.7-4.6% for FY18-19. Key supports are RM1.07 (17/18/19 Jan low) and RM1.06 (lower Bollinger band). Failure to hold near RM1.06 may weaken share prices lower towards RM1.00 zones. Cut loss at RM1.03.

Source: Hong Leong Investment Bank Research - 2 Feb 2018