Results

• Above street’s estimates. Engtex posted a 1QFY20 net profit of RM2.4m, which is well above ours and consensus estimates respectively.

• Cheerful YoY – Engtex’s 1Q20 net profit bounced to RM2.4m from RM0.1m in 1Q19 despite lower revenue achieved (-11% YoY) on the back of lower cost of sales (-14% YoY). Gross profit margin improved marginally to 13% from 11% a year ago. The Group’s profit before tax improved to RM4.7m (+136%) YoY from RM2.0m in 1Q19, lifted by lower finance cost of RM5.3m (-5% YoY) and intact operating expenses RM23.3m (-1% YoY).

• Better QoQ – The Group recorded a lower quarterly revenue to RM243.5m (-16% QoQ). The lower revenue happened across all the segments, from Property Development (-61% QoQ), Wholesale & Distribution (-10% QoQ), Manufacturing (-23% QoQ), and Hospitality (-44% QoQ). However, 1Q20 profit before tax posted a commendable result of RM2.9m (+61% QoQ) thanks to lower cost of sales (-20% QoQ) and lower operating expenses (-6% QoQ). Hence, net profit increased to RM2.4m (+178% QoQ).

Comment

• Commendable cost-cutting measure. Engtex has put hard efforts to pare down operating cost where operating margin improved (+2.0 ppts) QoQ and YoY respectively. Moving forward, the Group plans to cease new property launch due to its gloomy outlook in local property market. Together with shutting down of Ibis Style hotel located in Bandar Sri Damansara, we deem the Group’s operating costs could go down even further in the coming quarters.

• Disposing non-core assets. With the underlying hotel assets amounting to RM93m which are planned for sales, this will help Engtex to raise cash as well as diversify from non-core business. The move is favourable because the unforeseeable outlook of tourism sector will increase the Group’s uncertainty in the future.

• Solid orderbook. Engtex is currently holding RM150m orderbook which provides earnings visibility for the next 2 financial years. The Group is now tendering RM500m contracts. We feel confident that Engtex could at least achieve a success rate of 40% which would replenish its existing orderbook substantially amid slowing down in economy.

Valuation & Recommendation

• Despite several cost cutting measures have been done, we deem the impact of COVID-19 is yet to reflect in the current economic situation and its financial results. Therefore, we maintain our FY20F net profit of RM6.6m.
• We are upgrading our recommendation from HOLD to BUY with an unchanged target price of RM0.66, which is based on 0.4X FY20F P/B. The preemptive action and strategy realignment taken by the Group is praiseworthy. Also, we believe Engtex’s sturdy balance sheet (0.57x net gearing) is able to withstand prevailing economic storm.

Source: JF Apex Securities Research - 23 Jun 2020