Flat earnings YoY - 4Q17 net profit was flat at RM12.1m vs RM12.3m in 4Q16 mainly due to increased production cost which lowered gross margin to 16% from 19% in 4Q16.
Higher revenue - Quarterly revenue rose 17% YoY to RM309.7m as higher contribution from wholesale & distribution, manufacturing and hospitality cushioned the decline in property development sales.
Better demand - In 4Q17, revenue from wholesale & distribution increased 14% YoY to RM169m due to improved market demand amid volatility in international and local metal prices.
Improved steel sales - Manufacturing sales gained 28% YoY to RM130m due to higher sales of mild steel concrete pipes and certain steel products. Meanwhile, revenue from property development dropped 40% YoY to RM8.8m while revenue from hospitality increased to RM2m from RM0.3m in 4Q16.
Better QoQ – Quarterly net profit rose 12% QoQ while revenue increased 19% QoQ mainly due to rebound in market demand for certain metal related trading products and certain manufactured steel products.
Ongoing expansion - Currently, Engtex is investing in a new steel pipe plant in Kuantan and a steel mill plant in Melaka which will commence operations in 2Q18.
Meanwhile, the property division is expected to contribute from the ongoing development of Amanja serviced apartments in Kepong with unbilled sales of RM18.3m.
Dividend - Engtex declared a second interim dividend of 0.75 points, taking full year dividend to 1.5 sen and translating into a yield of 0.5%.
Valuation & Recommendation
Below expectation - FY17 net profit dropped 8% YoY to RM54.4m and achieved 87% of our full year forecast which is below expectation due to higher-than-expected production cost. Twelve months’ revenue was within forecast after climbing 3% YoY to RM1.11b. Despite falling short, we are keeping our estimates for FY18 and FY19 in anticipation of improved orders from the local infrastructure industry.
Water proxy - Engtex 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 program, which Engtex could benefit by supplying pipes directly to the government or to the main contractor.
We maintain our BUY call with an unchanged target price of RM1.36 based on FY18F EPS with forward PER of 10.5 times, based on industry peer average. This translates into a potential upside of 23% against its current share price.
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