Engtex’s overall outlook remains soft as most of the jobs tender as well as the Pan Borneo Highway project may only materialise potentially from 2H19 onwards. On a brighter note, management guides that the trading division is garnering better trading volumes since 1Q19 and may partially mitigate the weak near term prospects in manufacturing division. Following the write-off in inventories for FY18, this will provide Engtex a fresh start for its manufacturing division, if raw material price remains stable in FY19. We maintain our forecast, with higher TP of RM0.77 (from RM0.73) after rolling to FY20 horizon. Maintain SELL as valuations are not compelling at FY19-20 PE of c.20x.

Overall outlook remains soft. Following our recent meeting with the management, we believe the outlook will remain weak on the back of tepid construction environment, which will result in weak demand prospects at its wholesale & distribution and manufacturing segments (its bread and butter) protracting into FY19.

Manufacturing division – may recover in absence of inventory write-off. While demand for long steel products and pipes will likely remain lacklustre in 1H19 (arising from quiet construction activities and pipe replacement jobs), management shared that the manufacturing division should see better earnings from 1Q19, as product prices have stabilised since early Jan-19 (albeit marginally). Recall, Engtex wrote off RM3.4m worth of inventories in 4Q18 on the back of high raw material costs and lower selling prices (mainly on wire rod and steel bars). Looking ahead, Engtex has been constantly monitoring tenders in Malaysia to capture any opportunities from East Malaysia (Pan Borneo Highway, Sarawak) as well as pipe replacement projects in Malaysia, but this may only materialise from 2H19 onwards.

Wholesale and distribution (W&D) division. We understand that the W&D division has been garnering better sales volumes since 1Q19 as stockist have resumed on more aggressive replenishment activities and this should partially mitigate weak near term prospects at the manufacturing division.

Property division – focus remains bringing down unsold property units. Engtex has unsold property inventories valued at RM114.7m as of end-FY18 and management shared that it will continue to reduce the unsold property stocks by providing aggressive discounts. Meanwhile, for the hospitality sub-segment (3 hotels), the occupancy rate is hovering around 54-74%. We believe this will take time to grow and may still incur some marketing cost before it could breakeven at the bottomline. Management does not rule out the possibility of selling the business to interested buyers if a reasonable offer is made.

Forecast. Unchanged for FY19-20 and we have introduced our FY21 forecast.

Maintain SELL, TP: RM0.77. Maintain SELL with higher SOP-derived TP of RM0.77 (previously RM0.73) after rolling the valuation horizon to FY20. Our SOP-derived TP is based on 9x P/E on FY20 core PATAMI from WDD and MD and 1x book value of FY17 property segment. At c.20x PE on FY19-20 earnings, valuations are not compelling.

Source: Hong Leong Investment Bank Research - 4 Apr 2019