Quarterly Results

• Drop in earnings - 3Q17 net profit declined 6% YoY to RM10.8m following increased production cost and higher tax rate of 28% vs 26% in 3Q16.

• Higher revenue - Quarterly revenue rose 3% YoY to RM260.1m as higher contributions from manufacturing sales and property development cushioned the decline in wholesale & distribution.

• Lower demand - In 3Q17, wholesale & distribution revenue dropped 9% YoY to RM141.8m due to softening market demand as international and local metal prices continue to be volatile.

• Solid steel sales - However, manufacturing sales gained 20% YoY to RM107.1m due to higher sales of mild steel concrete pipes and certain steel products. Meanwhile, revenue from property development surged 48% YoY to RM9.6m.

• On a QoQ basis, total net profit dropped 21% while revenue declined 9% due to sluggish sales from wholesale & distribution and manufacturing.

Valuation & Recommendation

• Below expectation - 9M17 net profit dropped 10% YoY to RM42.3m and achieved 68% of our full year forecast which is below expectation. Meanwhile, nine months’ revenue shed 1% YoY to RM798.76m and was within expectation after making up 73% of our FY17 forecast.

• As such we are reducing our FY17 and FY18 EPS estimates by 16.5% and 14.6% respectively to account for higher-than expected production costs and tax rate.

• Currently, Engtex is investing in a new steel pipe plant in Kuantan and a steel mill plant in Melaka which will commence operations in 1Q18.

• Meanwhile, the sales of completed residential and commercial units in Selayang as well as ongoing development of Amanja serviced apartments in Sri Damansara are expected to contribute to its property development division. On future projects, Engtex has earmarked two landbanks for development in Gambang, Pahang and Kuang, Selangor.

• On the hospitality side, its third hotel Mercure Hotel in Selayang started operations in October.

• We are maintaining our BUY call with a lower target price of RM1.36 (previously 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 19% against its current share price.

• The company remains in a good position to benefit from infrastructure and piping projects by both the government and private sector. Under Budget 2018, the government allocated RM1.4b for non-revenue water programme, which Engtex could benefit by supplying pipes directly to the government or to the main contractor.

• Engtex declared a single-tier interim dividend of 0.75 sen/share which is within expectation.

Source: JF Apex Securities Research - 24 Nov 2017