We attended Engtex's analyst briefing which reaffirmed our neutral stance. To recap, manufacturing division was weaker due to higher raw material prices (HRC and wire rod), intense price competition amid softer demand sentiment and low utilisation rate in both its steel bar and ERW pipe plants. However, order book remains stable at RM118m (end Mar-18) and tender book has increased notably to RM617m. Meanwhile, property and hospitality divisions may drag Engtex amid unexcited outlook for property sector (unsold inventory: RM144m) and the latter is still in its gestation period and likely to incur higher branding and marketing related expenses before turnaround happens. We maintain our forecast with HOLD recommendation and unchanged SOP-derived TP of RM1.14.

We attended Engtex's analyst briefing and walked away reaffirming our neutral stance on Engtex.

Manufacturing division. To recap, EBITDA at the manufacturing division weakened by 12.9-16.2% QoQ and YoY to RM14.5m in 1Q18, on the back of (i) high raw material prices (in particularly, hot rolled coil and wire rod, which are used to produce mild steel pipes and wire mesh), (ii) intense price competition amidst weak demand sentiment, and (iii) low utilisation rate at both its steel bar and ERW pipe manufacturing plants (which have only commenced commercial production since 1Q18). While 2Q will likely remain weak (as festive season normally drag sales volume), management expects the division to perform better in 2H18, as prices of raw material have stabilised (since Apr-18) and it has plans to ramp up utilisation rate at the newly commissioned steel bar and ERW pipe production plants (Apr-18 utilisation rate was at 10.4% and 3.0%, respectively and management is expecting to ramp up to 50% by end Dec-18).

Order book remains stable. We understand that order book remains stable at RM118m end Mar-18 (vs. RM116m in end Dec-17). Tender book, on the other hand, has increased notably to RM617m (vs. RM462m in Dec-17), of which bulk of it is for new pipe laying projects.

Property and hospitality division to remain a drag. We believe the property and hospitality division will remain as a drag to Engtex, as (i) management has no plan to launch new property project anytime soon given the tepid demand outlook for property sector (we note that Engtex still has unsold inventory worth RM144m for its property development segment), and (ii) hospitality segment is still in its gestation period, and management shared that it will need to incur higher branding and marketing related expenses before turnaround happens.

Forecast. Maintain as the meeting yielded no major surprises.

Maintain HOLD, TP: RM1.14. Maintain HOLD recommendation with unchanged SOP-derived TP of RM1.14. Our SOP-derived TP is based on 9x P/E on mid-FY19 core PATAMI from wholesale and distribution division (WDD) and manufacturing division (MD) and 1x book value of FY17 property segment. While wholesale and distribution division will continue to do well, overall earnings will likely be dragged by the property and hospitality, and manufacturing divisions, at least in the near term. In our view, re-rating catalyst on the stock would emerge when there is a better clarity on construction and infrastructure projects (which will have a direct impact on Engtex's manufacturing division).

Source: Hong Leong Investment Bank Research - 13 Jun 2018