Highlights

• One-stop solution provider in piping industry. Engtex started as a small hardware retail shop and has grown to one of the leading integrated manufacturers and one-stop distribution centre in Malaysia for piping solutions.
• Diverse range of products and clientele. Engtex serves a wide range of clientele base (over 3,000 clients) with a comprehensive products mix (c.5,000 product groups). Over the past five years, wholesale and distribution division (WDD) contributed more than 55% towards its total revenue, resulting in the largest non-O&G player for pipes, valves and fittings (PVF) in Malaysia.
• Manufacturing division to be the growth driver. Manufacturing division (MD) is extending its reach into commodity steel products, such as Electric Resistance Welded (ERW) pipe and rolling mill products with the acquisition of two new plants. We forecast both the new plants may contribute revenue of RM124-144m in FY18-20, respectively.
• Healthier balance sheet. With the warrants conversion proceeds, Engtex will be able to pare down their debt, hence reducing their net gearing moving forward with a potential rollout of a dividend payout policy.

Catalysts

• Capacity expansion of DI pipe plant in new melting and pipe forming up to 1,200mm, and two new plants, which allows Engtex to boost the manufacturing segment.
• Steady orderbook (RM116m) and tenderbook (RM462m).
• Subsequent Langat 2 water treatment plant project may boost the piping demand.
• Under the 11th Malaysia Plan, Malaysia is expecting to reduce NRW to 25% by 2020, while in Budget 2018, RM1.4bn will be allocated for NRW initiatives by government.

Risks

• Fluctuations in raw material prices,
• Delay in construction works and infrastructure projects.

Forecasts

• We project a core PATAMI FY18 growth of 17.8% given the capacity expansion of the two newly acquired manufacturing plants, while earnings should be normalising into FY19-20 with an increase of 6.7% respectively.

Rating

Initiate with BUY, RM 1.41 (upside of 38%)

• Engtex offers investors an exposure to a pure piping player in Malaysia, where its forte lies within the non-O&G PVF with a one-stop solution provider for the water segment. With the conversion of the warrants, we expect the net gearing to reduce to 0.49x by FY20, providing a greater potential of dividends payout, eventually.

Valuation

• We initiate coverage on Engtex with BUY rating, with the SOP derived TP of RM1.41, based on (i) 9x P/E on mid- FY19 core PATAMI from WDD and MD and (ii) 1x book value of FY17 property segment, implying an upside of 38%.

Source: Hong Leong Investment Bank Research - 30 Mar 2018