Quarterly Results

• Lower earnings - 2Q18 net profit declined 54% YoY to RM6.3m due to higher raw material costs, escalated operating cost and higher interest cost.

• Stable revenue - Quarterly revenue was flat at RM286.1m as higher contribution from manufacturing and hospitality cushioned the decline in property development sales.

• In 2Q18, revenue from wholesale & distribution declined slightly by 2% YoY to RM165.8m but operating profit declined 28% YoY to RM14.9m due to volatility in international and local metal prices.

• Improved steel sales - Manufacturing sales gained 11% YoY to RM118.4m due to higher sales of wire mesh, steel bars and mild steel concrete-lined pipe. However, operating profit dropped 37% YoY to RM8.4m due to higher raw material prices.

• End of property projects – Quarterly revenue from property development dropped to zero after completing the development of Amanja serviced apartments in Sri Damansara. 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.

• Better hotel operations – 2Q18 revenue from hospitality jumped 78% YoY to RM2.4m as its 3 hotels recorded over 50% in occupancy rate.

• Expansion - The company’s new steel pipe plant in Kuantan and steel mill plant in Melaka commenced operations in 2Q18. 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.

Valuation & Recommendation

• Below expectation – 1H18 net profit of RM16.2m achieved 34% of our full year forecast which is below expectation. Six months’ revenue of RM584.3m was within forecast after making up 51% of our full year estimate. As such we are slashing our FY18 and FY19 EPS forecasts by 14% and 13% respectively.

• We are maintaining our HOLD call at a lower target price of RM0.88 based on FY18F EPS with forward PER of 10.5 times, based on industry peer average.

• Water proxy - Engtex remains in a good position to benefit from infrastructure and piping projects by both the government and private sector. The recent restructuring of Selangor water assets would provide boost to Engtex but actual pipe orders might actually come in much later.

Source: JF Apex Securities Research - 3 Sept 2018