Company update

• We attended Engtex’s analyst briefing with management providing updates on the company.

• New plants up and running - The company’s new steel pipe plant in Kuantan and steel mill plant in Melaka commenced operations with utilization rates of 2.7% and 10% respectively. The combined revenue contribution for both plants amounted to RM8.2m or 5.2% of total revenue in 1Q18.

• Management aims to raise capacity utilization to 50% by year end and expects to breakeven in one year with expectation of combined RM300m revenue contribution from both new plants.

• No new property development – Engtex has completed the development of Amanja serviced apartments in Sri Damansara, its final property project. Going forward, the management has no immediate plans for a new development despite having vast landbank. However, the management noted that assets like hotel and landbank are available for sale at the right price.

• Impact of change in government – The management welcomes the new government as it promotes transparency with more projects expected to be open tender.

• Engtex’s current order book stands at RM118m (MS pipes: RM94m and DI pipes: RM24m) while tenderbook is at RM617m. The management has not seen cancellation of government projects after the change in government.

Valuation & Recommendation

• Challenging quarter – Management expects 2Q18 to be tough due to less working days in view of Hari Raya Puasa festive season and higher raw material prices.

• Forecasts reduced – In view of higher material prices and competitive market environment, we are slashing our EPS forecast for FY18F and FY19F by 21.9% and 20.9% respectively while maintaining revenue estimates.

• Water proxy with catalyst from resolution of Selangor water impasse - Engtex remains in a good position to benefit from infrastructure and piping projects by both the government and private sectors. Potential catalyst is the government resolving the deadlock in Selangor water asset, paving way for the state’s pipe replacement project to kick off.

• We are lowering our call to HOLD from BUY with a lower target price of RM0.99 (RM1.27 previously) following our earnings downgrade. Our revised target price is now based on forward PER of 10.5 times of FY18F EPS, which is in line with the industry peer average.

Source: JF Apex Securities Research - 12 Jun 2018