INVESTMENT MERIT

- Share priced jumped 47%. Since our Trading Buy call at 12^th Sept 2013 at RM1.16, the stock has surged by 47%, outperforming the FBMKLCI index (+6.5%). We believe the stock has gained some recognition from the investors. Engtex has been identified as one of the water-related stocks that will benefit from the upcoming conclusion of Selangor’s water sector restructuring. At current price, we advocate investors to take profit as it is traded at +2-standard deviation above its 5-year historical average PER.

- Set to clinch big pipe orders from various infrastructure projects. In addition to Langat 2 as mentioned in our last report, Engtex is also eyeing water pipe supplies to other infrastructure projects namely Pengerang and Kuantan Port. Nonetheless, timing-wise, even if the award of these projects materialize in the next 3-6 months, we only expect the contractors to start ordering the water pipes at the beginning of 2015 as the initial civil works (i.e. earthworks) have to be completed first. Normally, the civil works will take about 12 – 18 months.

- RM5.0b potential orders for NRW reduction programme after the restructuring? Roughly speaking, the management is looking at RM5.0b worth of pipe replacement orders from PAAB to reduce the Selangor and Klang Valley NRW to 15% from c.32% currently. We believe PAAB will be spending heavily on the NRW reduction programme after the Selangor’s water asset restructuring exercises are completed, most likely by end of this year. Although we reckon that the government will not simply spend the whole RM5.0b in one particular year or two, it will still benefit the leading water pipe player like Engtex in the foreseeable future.

- Part of FY14 earnings will be driven by its property division. Engtex currently has two on-going property projects (i.e. Tiara Residence and Emerald Avenue) which are set to be completed by end-2013 – 2014. Both projects have been doing well with take-up rates of 67% – 85%, which will support its profit growth from FY14 onwards.

- Fairly valued, take profit. While we reaffirm our view that the company’s prospects remain bright in the foreseeable future, we reckon the stock is already fully priced at this juncture as it is already trading at its ”peak valuation” i.e. PER of 9.6x (i.e. +2 SD). Hence, we advocate investors to take profit. Our fair value maintained at RM1.59, benchmarked against its historical average PER of 6.0x FY14E EPS. Re-rating catalysts includes faster-than-expected of award of Langat 2, Pengerang and Kuantan Port projects, which may compel a revisit, going forward.

TECHNICALS

- Resistance: RM1.78 (R1), RM2.00 (R2)

- Support: RM1.60 (S1), RM1.51 (S2)

- Comments: Chart-wise, a potential short-term correction could be in the making as the bullish momentum is beginning to fade as shown by key indicators such as RSI, MACD and Stochastic. Hence, we suggest to take profit for now.

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 manufactured are: (i) 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 and (iii) bitumens products, PVF and general hardware. It is also involved in some property development projects with a GDV of about RM1.0b.

BUSINESS SEGMENTS

- Manufacturing. Engtex’s manufactured products namely Ductile Iron (DI) pipes, mild steel, wire mesh and valves, fittings, bitumen and steel products makes up about 50% of the Group’s 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. The division also contributes about half of the Group’s EBITDA.

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

Source: Kenanga