Quarterly Results

• 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.

Source: JF Apex Securities Research - 28 Feb 2018