Result

• Engtex’s 2Q17 net profit declined 34% YoY to RM13.6m following lower revenue, increased production cost and higher tax rate of 32% vs 23% in 2Q16.

• Meanwhile, 1H17 net profit dropped 11% YoY to RM31.5m but achieved 50.5% of our full year forecast. Six months’ revenue shed 4% YoY to RM538.6m mainly due to 15% decline in wholesale & distribution revenue.

Comment

• Quarterly revenue dropped 4% YoY to RM284.7m as higher manufacturing sales failed to make up for declines in wholesale & distribution and property development.

• In 2Q17, wholesale & distribution revenue dropped 15% YoY to RM168.9m due to softening market demand as international and local metal prices continued to be volatile.

• However, manufacturing sales gained 19% YoY to RM106.8m due to higher sales of mild steel concrete pipes and certain steel products.

• Meanwhile, revenue from property development declined 20% YoY to RM7.7m as its Amanja development heads for completion by year-end.

• On a QoQ basis, net profit dropped 24% due to absence of gain from land disposal of RM7.1m in 1Q17 while revenue rose 12% due to a 25% surge in revenue from wholesale & distribution.

• 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 and secure contracts from pipe replacement or new water plant projects.

• On its property division, Engtex has earmarked two landbanks for development in Gambang, Pahang and Kuang, Selangor. On the hospitality side, start-up costs of a third new hotel would weigh on the division’s earnings. However, we are not concerned as property and hospitality contribute only 3.9% of 2Q17 revenue.

Earnings Outlook / Revision

• No change in earnings estimates.

• Despite the decline in 2Q17 earnings, Engtex’s performance is within expectation as we project 2017 net profit growth to slow to 5.3% from 47% in 2016 in view of cautious sentiment in the property, construction and infrastructure industries, before growing 18.7% in 2018.

Valuation & Recommendation

• We are maintaining our BUY call on Engtex with 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 - 24 Aug 2017