We initiate coverage on Engtex Group Bhd (ENGTEX) with an OUTPERFORM call and TP of RM0.77 based on FY23F PER of 7x. Being one of the largest pipe manufacturers locally, the company is well positioned to benefit from the revival of water infrastructure projects as well as the initiative to reduce non-revenue water (NRW) from 34% in 2020 to 25% by 2025.

A major pipe player locally. ENGTEX manufactures and distributes various steel products including mild steel (MS) and ductile iron (DI) pipes, generic wire mesh and steel re-bars used in the construction industry. Historically, generic wire mesh, re bar and other steel products contributed c.63% to manufacturing turnover while pipes made up the balance c.37%. Meanwhile, its property development (which suffers low take-up rates) and hotel operations (running at low occupancy rates) have been loss making.

Pipe replacement activities to buoy demand. There is a line up of pipe replacement programmes under the 12th Malaysia Plan (12MP) – in Selangor as well as nationwide. The latest statistics from Suruhanjaya Perkhidmatan Air Negara (SPAN) point to 70- 75% of NRW stemming from leaks, bursts, and damages to pipes and fittings. Meanwhile, according to Malaysia Water Association (MWA), the water distribution network in Malaysia is made up of MS pipes (29.1%), asbestos-cement (AC) pipes (27.1%) and DI pipes (8.0%).

A specialist in DI pipes and large-diameter MS pipes. We understand that ENGTEX is the only maker of large-diameter MS pipes of up to 3m locally, used in upstream water supply projects. Meanwhile, it is one of the only two producers of DI pipes locally (the other being Penang-based YLI holdings). Highly corrosion resistant, DI pipes are widely used in water distribution.

Pipes order book. YTD, the group has secured new contract wins of RM151m from the Sungai Rasau Treatment plant’s main contractors i.e. Gamuda Bhd (for Package 1) and Taliworks Corporation Bhd (for Package 2 and 3). Currently, ENGTEX’s outstanding order book stands at RM285m (DI pipes: RM29m, MS/pilling pipes: RM256m) while potential tender stands at RM623m (DI pipes: RM54m, MS/pilling pipes: RM569m).

We initiate coverage with a MARKET PERFORM call. We like ENGTEX for: (i) the huge potential in the water pipe replacement market locally, (ii) its dominant market positions in both large diameter MS pipes and DI pipes, and (iii) its strong earnings visibility underpinned by significant order backlogs and a strong pipeline of new projects.

We value ENGTEX at RM0.77 based on FY23F PER of 7x, at a discount to 9x forward PER of peer Hiap Teck Venture Bhd given the latter’s slightly smaller size. There is no adjustment to our target price based on ESG given a 3-star rating as appraised by us (see Page 9).

Risks to our forecasts include: (i) volatility in input costs and end-product selling prices; and (ii) delays in the rollout of water infrastructure projects.

Source: Kenanga Research - 8 Nov 2022