Background

ENGTEX is a leading one-stop pipeline system provider in Malaysia with integrated manufacturing facilities and a distribution arm with nationwide network.

It is also one of the few players in the country with the ability to manufacture large-diameter pipes with Ductile Iron (DI) pipes, Mild Steel Cement-Lined (MS) pipes with Wire Mesh as its main products.

For Wholesale & Distribution segment, ENGTEX distributes pipes, valves & fittings (PVF), and other products include steel and plumbing products, general hardware, and construction material with network across East and West Malaysia.

Besides Manufacturing and Wholesale & Distribution, ENGTEX is also involved in Property Development business. Its on-going project is Amanja in Kepong, a 224-unit service residence development with GDV of RM163.7m. It has two completed projects, Tiara Residence and Emerald Avenue.

Key takeaways

In FY16, ENGTEX record a record-breaking earnings with growth of 48.0% yoy to RM60.6m despite revenue dropping 7.5% yoy to RM1,074.3m, mainly attributed to improved gross profit margin.

Management mentioned they have strengths in their products mix, being one of the few local large diameters pipe system providers. The Group is also keeping up with the market demand in terms of product types by adding 1200mm diameters DI pipes into their product portfolio.

The Group’s order-book for DI pipes and MS pipes is at RM150.0m with Selangor pipe replacement programme, Langat 2 and RAPID among the projects. Meanwhile, the tender book currently is RM253.0m comprises of project tenders in Selangor, Johor and Pan Borneo.

Outlook

On the impact of implementation of safeguard duties on wire rod (raw material for wire mesh), management shared that they still have other options for suppliers beside the 40 countries on the safeguard list and they have the ability to pass part of the cost to customers. Therefore, the impact could be minimal.

The Group is planning to pare down their debt from the cash raised from the conversion of its warrants, which are expiring on 25th October 2017. With full conversion, the amount of cash raised will be around RM110.5m. The Group is also in the midst of selling two of its land banks worth around RM20.0m to manage its gearing level with the proceeds.

ENGTEX is believed to be a beneficiary of the water sector restructuring which is currently pending due to takeover negotiation between the Selangor government and SPLASH. Restructuring of the sector will lead to ‘asset light’ operators while most water assets will be taken over by Pengurusan Aset Air Berhad (PAAB), a company formed as part of government’s effort to restructure the water services industry. Moving forward, cost of building new water infrastructures and maintenance of water assets such as pipe replacement will be borne by PAAB and this will improve the efficiency of nationwide pipe replacement exercise. The total value estimated for the pipe replacement activities nationwide is around RM10.0b.

Risk

• Fluctuation of raw material prices.
• Further delay of projects implementation.

Conclusion

Being one of the few local players who can provide large diameters pipes, ENGTEX is the proxy to local water piping infrastructure scene.

Development in the on-going restructuring of water services industry which could be a major breakthrough for the Group as it has a good track record supplying pipes to PAAB under 2-year renewable contract for the past several years.

At the last closing price of RM1.25, ENGTEX is trading at 7.2x FY16E PER.

Source: Kenanga Research - 19 Apr 2017