Engtex’s 1Q18 core PATAMI of RM9.9m (QoQ: -18.6% and -8.6%) missed expectations, accounting for only 17-18% of consensus and our full-year forecasts. Key deviations against our forecasts include (i) lower-than-expected utilisation rate at rolling mill, and weaker-than-expected performance at property division. We cut our FY18-20 core PATAMI forecasts by 28.1%, 21.9% and 24.3%, respectively after lowering down our EBITDA margin assumptions in view of the slowdown in the market demand for manufactured steel products. Downgrade to HOLD with lower SOP-derived TP of RM1.14.

Missed expectations. Engtex’s 1Q18 core PATAMI of RM9.9m (QoQ: -18.6%; YoY: - 8.6%) missed expectations, accounting for only 17-17.7% of consensus and our full year forecasts. Key deviations against our forecasts include (i) lower-than-expected utilisation rate at rolling mill, and weaker-than-expected performance at property division.

QoQ. 1Q18 core PATAMI declined by 18.6% to RM9.9m mainly due to the softening of market demand for certain metal-related trading products and manufactured steel products (which in turn was due to volatile steel prices), as well as escalated development cost in its recently completed property project in Kepong.

YoY. 1Q18 core PATAMI fell by 8.6% to RM9.9 on the back of intensified price competition and raw material costs at manufacturing division (in particular, the wire mesh and rolling mill sub-segments).

Outlook. Following the change in government administration post GE14, we have turned cautious on the overall potential delay and/or cancellation in the implementation of construction and infrastructure projects may result in weaker demand for building materials (which is the bread and butter for Engtex).

Forecast. We cut our FY18-20 core PATAMI forecasts by 28.1%, 21.9% and 24.3%, respectively after lowering down our EBITDA margin assumptions for trading and manufacturing divisions in view of the potential slowdown in the market demand for manufactured steel products.

Downgrade to HOLD, TP: RM1.14. We lower our SOP-derived TP by 18.9% to RM1.14 (from previously RM1.41) to reflect the downward revision in our core PATAMI forecasts. Our SOP-derived TP is based on 9x P/E on mid-FY19 core PATAMI from WDD and MD and 1x book value of FY17 property segment.

Source: Hong Leong Investment Bank Research - 25 May 2018