• More than 30 years’ experience - Engtex is the largest distributor of non-oil & gas pipes, valves and fittings (PVF), plumbing materials, building & construction materials, general hardware products and steel related products. With over 30 years of experience, Engtex has a wide distribution network around the country.

• Leadership position - During the same period, Engtex also established itself as a dominant pipe manufacturer catering to the water and sewerage sectors.

• Engtex also ventured into production of wire mesh to cater for the construction and infrastructure sectors and is currently among the top 3 wire mesh manufacturers in Malaysia.

• Benefit from govt. infra spending - Being a leading integrated pipeline systems provider and supplier, Engtex is a beneficiary of nationwide piping projects from both public and private sectors.

• Earnings growth would come from water & sewerage projects on the back of the ongoing expenditure on infrastructure undertaken by the federal government under 11MP and state governments.

• More contracts from Langat 2? Under the Langat 2 water treatment plant project, Engtex has secured RM127m worth of piping contracts from Phase 1 & 2 and is looking to bid for more jobs from Phase 3 & 4.

• New water treatment plants - The Selangor government announced its plan to build two water treatment plants with a combined cost of RM800m to be completed in end-2017 and 2019.

• Pipe replacement - Apart from new piping projects, there is also potential for pipe replacement in line with the government’s target to reduce NRW to 25% by 2020 by replacing burst pipes.

• Steady orderbook - Engtex’s orderbook currently stands at RM175m to be delivered in 3 to 4 months. The company is bidding for another RM340m worth of jobs from all around the country as well as the Asean region.

• Flat property earnings not a concern - With the Amanja serviced apartments to be fully completed later this year, earnings contribution from the property division is expected to be flat until new property launches. On the hospitality side, start-up costs of a third new hotel would weigh on the division’s earnings. However, we are not overly concerned as property and hospitality contribute only 3.7% of 1Q17 revenue. The lion share of group’s earnings is contributed by the Manufacturing and Wholesale & Distribution arms that mainly cater for sectors such as Water & sewerage, Infrastructure and Construction.
   
• Overall, we expect 2017 and 2018 net profit to grow 5.3% and 18.7% on the back of revenue growth of 2.2% and 7.9% respectively.
   
• Cash proceeds from warrants - Engtex has 133m warrants which will expire in October 2017. Conversion of the warrants could raise RM110m to reduce borrowing, expand production and fund upcoming property development.

Valuation & Recommendation

• We are initiating coverage on Engtex with a BUY call at a target price of RM1.60 based on FY18F EPS with forward PER of 10.2 times, based on industry peer average. This translates into a potential upside of 26% against its current share price.

Source: JF Apex Securities Research - 7 Aug 2017