Quarterly Results

• Better YoY – Engtex’s 4Q19 net loss more than halved to RM3.1m from RM7.2m in 4Q18 on the back of better-controlled cost of sales. Gross profit margin improved slightly to 10% from 8% a year ago. The group’s profit before tax improved to RM2.9m (+156%) YoY from a net loss RM5.2m in 4Q18, lifted by higher non-operating income of RM5.6m (+300% YoY) and lower operating expenses RM24.8m (-5% YoY) as well as lower finance cost (-34%).

• Sluggish QoQ – The group recorded a lower quarterly revenue to RM290.5m (-3% QoQ) due to lower contribution from Property Development (-66% QoQ) while other segments presented mix revenue contributions namely Wholesale & Distribution (-1% QoQ), Manufacturing (+2% QoQ), and Hospitality (+4% QoQ). 4Q19 operating profit posted a moderate result of RM14.6m (-2% QoQ) mainly dragged by Manufacturing (-50% QoQ), Property development (-143% QoQ) and Hospitality (-33% QoQ) despite higher contribution from Wholesale & Distribution (+50%) segment. Aggregately, profit before tax declined to RM2.9m (-11% QoQ).

• 12MFY19 vs 12MFY18. No thanks to soft market demand and increased operating costs (+6% YoY) for metal and steel products, profit before tax slumped to RM11.9m (-47% YoY) from RM22.4m in 2018. After excluding a one-off gain from disposal of vacant industrial land at North Port Klang totaling RM6.6 million and inventories write down of RM3.8m, normalized PBT was RM9.1m (-59% YoY).

Valuation & Recommendation

• Below street’s estimates. For the full year of 2019, the group posted a net loss of RM1.2m, which is well below ours and consensus estimates of RM3.4m & RM3.2m respectively. The shortfall was mainly caused by flattish revenue and higher cost of sales. However, 2019 revenue achieved 99% of our full year forecast of RM1124.9m.

• We cut our FY21F net profit to RM6.6m (-50%) from RM13.2m on the back of lukewarm of local property market and potential product demand slowdown impacted by COVID-19 in 1HCY2020.

• We are keeping our recommendation at HOLD with an unchanged target price of RM0.66, which is based on 0.4X FY20F P/B. The worst is yet to over as now cabinet reshuffle halted the new policy making on water infrastructure projects and the possibility of water tariff hike on hold.

Source: JF Apex Securities Research - 28 Feb 2020