Quarterly Results

• Into the red – Engtex posted a net loss of RM7m in 4Q18 against a net profit of RM12.1m in 4Q17 due to higher cost of sales (+9% YoY to RM283m) as a result of escalated material price for metal and steel products.

• Flat revenue – Quarterly revenue was flat at RM308.5m (vs RM309.2m in 4Q17) as higher contribution from Wholesale & Distribution (+5% YoY to RM177m) cushioned the declines in Manufacturing (-2% YoY to RM128m), Property development (- 77% YoY to RM2m and Hospitality (-3% YoY to RM1.9m).

• Lower QoQ - 4Q18’s net loss came against a net profit of RM3m in the previous quarter while quarterly revenue declined 2% QoQ.

• For the full year of 2018, net profit dropped 77% to RM12m despite revenue climbing 9% YoY to RM1.2b. 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, startup costs at two new plants in Melaka and Kuantan respectively and maintenance costs of unsold properties in Kepong and Selayang.

• 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.

• 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% and expects to breakeven in one year with expectation of combined RM300m revenue contribution from both new plants.

• New product – Engtex 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 second quarter of 2019 to expand the wider range of product sizes in the water and sewerage sectors.

Valuation & Recommendation

• Way below expectation – 2018 net profit achieved only 31% of our full year forecast no thanks to higher material cost. Twelve months’ revenue was within forecast after making up 98% of our full year estimate. We are keeping FY19 and FY20 EPS forecasts as we expect earnings to be lifted by contributions from the two new plants.

• We are keeping our recommendation at BUY with an unchanged target price of RM1.11 based on FY19F EPS with forward PER of 10 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 restructuring of Selangor water assets would provide boost to Engtex but actual pipe orders might actually come in later.

Source: JF Apex Securities Research - 28 Feb 2019