Engtex 4Q19 registered a core net loss of -RM7.6m (3Q19: +RM1.1m, 4Q18: - RM7.0m), bringing FY19 core net loss to -RM7.4m (FY18: +RM9.9m). The results missed ours and consensus expectations of RM3.4m profit due to soft market demand for its products, higher direct and operating costs. We opine demand for its trading and manufactured steel products are likely to stay soft amid the sluggish construction and infra-activities amid political uncertainty. We are ceasing coverage on Engtex due to reallocation of our internal research resources and lack of catalysts. Our previous forecast, SELL recommendation and TP of RM0.48 (based on SOP) should no longer serve as a reference going forward.

Missed expectations. Engtex recorded core net loss of -RM7.6m in 4Q19 (3Q19: +RM1.1m, 4Q18: -RM7.0m), bringing FY19 core net loss to -RM7.4m (FY18: +RM9.9m). The results came in below expectations which missed our and consensus full-year forecasts of RM3.4m profit. FY19 core net loss was reached after adjusting for net EI of RM6.5m on gain on disposal of asset held for sale, right -of-use assets, net loss on disposal of investment property and property, plant and equipment.

Deviations. Key deviations were mainly due to (i) soft market demand for its trading and manufactured steel products; (ii) higher-than-expected operating costs in its rolling mill and ERW plants; and (iii) higher-than-expected procurement cost in raw materials (steel billets and wire rods) for manufacturing division.

Dividend. 0.625 sen declared in 4Q19/FY19. FY18’s dividend stood at 0.75 sen.

QoQ. 4Q19 fell into the red, with a core net loss of -RM7.6m (vs. core net profit of RM1.1m in 3Q19). The weaker performance was attributed to slower-than-expected replenishment activities for its metal products, poor property sales as well as slower delivery of pipes to East Malaysia (takes longer time due to barge transportation).

YoY/YTD. Similarly, FY19 turned into a core net loss of -RM7.4m (vs. RM9.9m in FY18) due to (i) still-sluggish construction and infrastructure activities, resulted to lower demand for its trading and manufactured steel products; and (ii) higher-than expected procurement cost of raw materials in manufacturing division. In addition, the higher operating costs to maintain its property and hospitality divisions contributed to the negative result.

Outlook. We opine demand for Engtex’s trading and manufactured steel products are likely to stay soft on the back of sluggish construction and infrastructure activities as well as the recent political developments, which may cause further delays in execution of mega project works. Furthermore, softer property launches would dampen the demand for its trading and manufactured steel products. Meanwhile, the ongoing Covid-19 outbreak could affect its hotel division occupancy rate, at least for 1H20.

Cease coverage. We are ceasing coverage on Engtex due to reallocation of our internal research resources and lack of catalysts. Our previous forecast, SELL recommendation and TP of RM0.48 (SOP-derived TP based on 9x PE on FY20 core PATAMI from the WDD and MD divisions and 1.0x book value for the property segment) should no longer serve as a reference going forward.

Source: Hong Leong Investment Bank Research - 28 Feb 2020