Quarterly Results

• YoY decline – Engtex’s 3Q19 net profit dropped 63% YoY to RM1.1m as the company was hit by a double whammy of lower demand as a result of weak market conditions and higher material and operating costs as well as higher tax rate.

• Lower revenue – Quarterly revenue declined 5% YoY to RM299.5m due to lower contribution from Wholesale & Distribution (-8% YoY to RM170.3m), Manufacturing (-11% YoY to RM111.8m) and Hospitality (-10% YoY to RM2.6m) while Property development sales grew over 16 times to RM14.7m thanks to higher property sales from the Amanja project in Kepong (units sold at 72.3% vs 56.7% in 2018).

• The Wholesale & Distribution division, the company’s biggest earnings contributor, saw operating profit dropped 52% YoY and 42% QoQ to RM7.1m due to weakened demand and higher material cost. However, the Manufacturing division managed to lift operating profit by 15% YoY and 110% QoQ to RM8.2m.

• Better QoQ – Overall 3Q19 revenue and net profit grew 18% QoQ and 13% QoQ respectively due to improvement in all business divisions.

Valuation & Recommendation

• Below expectation – 9M19 net profit declined 88% YoY to RM2.2m and achieved only 35% of our full year forecast no thanks to higher material cost and declined sales. Nine months’ revenue was within forecast after making up 74% of our full year estimate.

• We are reducing FY19 EPS estimate by 40% to factor in higher costs and tax while keeping FY20 EPS forecast amid challenging outlook in absence of major water projects.
   
• We are keeping our recommendation at HOLD with an unchanged target price of RM0.66 based on 0.4X FY20F P/B. Potential rerating catalysts include acceleration of government water infrastructure projects and possibility of water tariff hike.

Source: JF Apex Securities Research - 25 Nov 2019