INVESTMENT MERIT

- Market leader. Engtex is one of the leading pipes players in Malaysia. It is one of the players in the domestic duopoly ductile iron (DI) market and is also amongst the few players able to manufacture large diameter mild steel (MS) pipes up to 2600mm. Other attributes include being the top 3 wire mesh producers in Malaysia and largest player of non-O&G pipes and valves & fittings (PVF). Engtex’s production capacity of about 204k tonne annually is spread out between DI(60k), MS(36k) and wire mesh(108k).

- Wide distribution network. We like the fact that Engtex has a wide distribution network throughout Malaysia. It has about 14 distribution centre of which 8 are in the peninsula while the remainder 6 are in East Malaysia. This will definitely complement its manufacturing division. Currently it is building an 18k tonne wire mesh plant in Kota Kinabalu, scheduled to be completed this year to cater for the West Malaysia market.

- Proxy to robust water sector. Being one of the top suppliers of water-related pipes in Malaysia, Engtex is poised to benefit from the government spending on water infrastructure. The next big water project would be the proposed RM1.2b Langat 2 treatment plant which requires about RM200m worth of MS pipes. Interestingly, based on our channel checks, some of the shortlisted main contractors of the Langat 2 project are Engtex’s clienteles. Hence, we would not be surprised should Engtex secure MS pipes orders from this project.

- Strong 1H13 results. The stock’s 1HFY13 revenue climbed 23% YoY largely due to significant rise in manufacturing business. PBT margin also improved from 6.7% to 7.4% thanks to increased capacity utilization. Furthermore, even though the tax expenses was higher in 1HFY13, net margin was sustained at 5.1%.

- Trading BUY. Its share price has risen significantly by 35% YTD. Nonetheless, it is still trading at 22% discount to its 5–year average PER of 6.0x. Benchmarked against the PER of 6.0x FY14E EPS, the stock is valued at RM1.59. The re-rating catalyst include big pipe orders from the Langat 2 project.

TECHNICALS

- Resistance: RM1.32 (R1), RM1.48 (R2)

- Support: RM1.06 (S1), RM0.85 (S2)

- Comments: Despite being stuck in consolidation mode since mid-July, ENGTEX’s overall uptrend remains largely intact. A decisive breakout above RM1.20 would trigger renewed buying interest and propel it towards RM1.32 (R1) and RM1.48 (R2) next. Watch for a breakout.

BUSINESS OVERVIEW

Founded in 1983, Engtex is a leading one-stop pipeline system provider in Malaysia. It is primarily involved in the manufacturing and distribution of water and steel-related products. Amongst the products/services are: ductile iron (DI) pipes, (ii) mild steel (MS) pipes and fittings, wire mesh, hard drawn wire and steel service center, valves, hydrants, fittings, pipe asphalt/coatings & bitumens products, PVF and general hardware. It also has some property development projects with GDV of about RM1.0b.

BUSINESS SEGMENTS

- Manufacturing. Ductile iron (DI) pipes, mild steel, wire mesh and valves, fittings, bitumen and steel products are the main contributors for the group’s bottomline, making up about 50% of the EBITDA.

- Wholesale & Distribution. Mainly PVF and general hardware where the products are distributed to hardware dealers, general hardware stores, subdealers, state waterworks departments, mechanical, and electrical contractors. This division contributes about half of the Group’s EBITDA.

- Property development. Engtex has about 68 acres of landbank in Selayang, Kepong, and Kuantan. Outstanding GDV stood at RM1.0b which will last until 2016. As the division is new to the Group, the earnings merely contributed 4-5% of EBITDA.

Source: Kenanga