Company update

• We attended Engtex’s analyst briefing and came away feeling reaffirmed of the company’s prospects despite the ongoing water issue in Selangor.

• Ongoing expansion - Engtex has invested in 2 new plants which are expected to contribute positively by year-end: 1) Engtex bought an Electric Resistance Welded (ERW) pipe plant in Kuantan from Amalgamated Industrial Steel Bhd (AISB). The plant enjoys 10 years of pioneer status tax incentive under the East Coast Economic Region. It is estimated to have 17% share of the ERW market which caters to rural areas that require smaller diameter pipes. The plant is currently under commissioning and pending certification with 3 lines expected to commence operations in 2H18. 2) Engtex acquired a steel mill plant in Melaka through receivership (previously owned by Maju Steel). The plant has a capacity of over 100k MT to produce steel bar products. It is currently being commissioned and will commence operations in 2Q18.

• Business as usual - On its ongoing operations, the Manufacturing division continues to lead earnings growth with key products such as ductile iron (DI) pipes, mild steel (MS) pipes and wire mesh while the Wholesale & Distribution division was impacted by volatile metal prices.

• Lower property revenue - Meanwhile, sales from the Property division are expected to decline going forward after completing its only property development, the Amanja serviced apartments in Kepong. Unbilled sales stand at RM18.3m while unsold stock is at RM146.7m. On its landbank, management is considering disposal or joint venture development.

• On its Hospitality division, its third hotel named Mercure was opened in Selayang in October 2017 with occupancy rate of 50% currently. Meanwhile, Ibis Style (Bandar Sri Damansara) and Avenue J (Leboh Pasar) achieved occupancy rates of 80% and 50% respectively. Earnings contribution from this division is expected to be around breakeven level for FY18.

Valuation & Recommendation

• We are lowering our sales and EPS estimates for FY18 by 3% and 5% respectively due to lower demand caused by volatile steel prices and slower property sector. However, we are lifting our FY19 sales and EPS forecast by 25% and 9% respectively in anticipation of contribution from the 2 new plants.

Source: JF Apex Securities Research - 16 Mar 2018