Quarterly Results

• Dismal performance – Engtex’s 2Q19 profit after tax of RM0.85m plunged 84% YoY due to lower revenue, higher tax rate and higher costs as a result of escalated material price for metal and steel products but cushioned by higher other operating income and lower finance costs.

• Lower revenue – Quarterly revenue declined 11% YoY to RM254.6m due to lower contribution from all divisions, mainly Manufacturing (-9% YoY to RM151m) and Wholesale & Distribution (-17% YoY to RM98m) due to global trade tensions and lower demand.

• Margins pressured – Overall 2Q19 margins declined about 2 to 3 percentage points as compared to 2Q18 due to higher costs.

• Flat QoQ – 2Q19 PAT of RM0.85m showed improvement against RM0.1m in the previous quarter despite quarterly revenue falling 7% QoQ, thanks to higher other operating income while profit margins have stabilized.

• Challenges remain – Outlook remains cloudy with no immediate recovery as global demand for pipe products remains weak. Engtex is also incurring start-up costs from its new steel pipe plant in Kuantan and steel mill plant in Melaka.

• Ongoing expansion – 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 3Q19 to expand the wider range of product sizes in the water and sewerage sectors.

Valuation & Recommendation

• Below expectation – 1H19 PAT achieved only 2% of our full year forecast of RM50.3m no thanks to higher material cost and lower revenue. Six months’ revenue was also below forecast after making up 34% of our full year estimate with the Manufacturing division suffering the most. We are slashing our revenue and EPS forecasts by 27% and 88% for 2019 and 24% and 76% for 2020 respectively as new orders would take time to be booked.

• We downgrade our recommendation to HOLD with a lower target price of RM0.66 (from RM1.11) based on 0.4x FY20F P/B, which is at its low in 2013.

Source: JF Apex Securities Research - 23 Aug 2019