Results

• Lower earnings - 3Q18 net profit plunged 72% YoY to RM3m due to higher material cost (+29% YoY to RM279m) and escalated operating cost (+11% YoY to RM26m) as a result of the commencement of two new plants and higher interest cost (+37% YoY to RM8m).

• Higher revenue – Despite the lower profit, quarterly revenue grew 21% YoY to RM315mm as higher contribution from Wholesale & Distribution (+31% to RM186m), Manufacturing (+17% to RM126m) and Hospitality (+71% to RM2.9m) cushioned the decline in Property development (-90% to RM0.9m).

Comment

• Lower QoQ - 3Q18 net profit dropped 52% QoQ due to above mentioned reasons despite quarterly revenue climbing 10% QoQ.

• Higher global demand for metal and steel products resulted in higher sales in Wholesale & Distribution and Manufacturing divisions. However, profit margins were pressured by higher raw material cost.
• End of property projects – With the completion of its Amanja serviced apartments in Sri Damansara, the management has no immediate plans for a new property development despite having vast landbank and will focus on selling its unsold units.
• Improved hotel operations – 3Q18 revenue from hospitality jumped 78% YoY to RM2.9m as its 3 hotels recorded over 55% in occupancy rate.

• Future expansion – Engtex’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.

• New product - The group is currently installing a new ductile iron pipe production line to produce pipes with diameter up to 1,200mm and this line will be operational by the first quarter of 2019 to expand the wider range of product sizes in the water and sewerage sectors.

Earnings Outlook / Revision

• Below expectation – 9M18 net profit of RM19.2m achieved 49% of our full year forecast which is below expectation. Nine months’ revenue of RM899.5m was within forecast after making up 73% of our full year estimate. As such we are slashing our FY18F and FY19F EPS forecasts by 37% and 8% respectively. Also, FY19 revenue forecast is reduced by 5%.

Valuation & Recommendation

• We upgrade our recommendation to BUY from HOLD with a higher target price of RM1.11 (from RM0.88) as we roll over our valuation to FY19F EPS with forward PER of 10 times, based on industry peer average. We expect FY19F earnings to be lifted by contribution from the two new plants.

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

Source: JF Apex Securities Research - 23 Nov 2018