ENGTEX’s 9MFY23 results met our expectation. Its 3QFY23 core net profit almost doubled thanks to higher sales and as inventory cost normalised. The sentiment towards water-related stocks has improved following recent news on potential water tariff hikes nationwide. We maintain our forecasts but raise our TP by 33% to RM0.77 and upgrade our call to OUTPERFORM from MARKET PERFORM.

Its 9MFY23 core net profit of RM9m met our expectation at 73% of our full-year forecast but disappointed the market at only 65% of the full-year consensus estimate.

Results’ highlights. YoY, its 9MFY23 revenue inched up 1% thanks to a recovery in demand for its generic steel products. However, its core net profit plummeted 78%, weighed down by high-cost inventory (i.e. hot rolled coil, wire rod and scrap metal) due to the downtrend in steel prices over the last one year.

QoQ, its 3QFY23 core net profit surged 92% driven by a higher sales volume and as it gradually depleted high-cost inventory. Also helping, was the bottoming of product prices as the steel price trend stabilised (see chart on next page).

Outlook. The sentiment towards water-related stocks has improved following recent news on the Natural Resources, Environment and Climate Change Ministry having submitted a proposal to the Cabinet on a mechanism to review water tariffs across all states (of which some have not been adjusted in the past four decades).

Being a water pipe maker, ENGTEX will benefit from efforts to reduce the national non-revenue water (NRW) from 36% in 2021 to 20% by 2030, and 15% by 2049. It is estimated that 70%-75% of current NRW is attributed to issues such as leaks, pipe bursts, and damaged fittings.

Forecasts. Maintained.

However, we raise our TP to RM0.77 (from RM0.58) as we recalibrate our valuation basis to 0.4x PBV, which is in line with peer YLI (Not Rated) (from 0.3x PBV previously). There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 5).

We like ENGTEX for: (i) the huge potential in the water pipe replacement market locally, (ii) its dominant market position in both large-diameter mild steel pipes and ductile iron pipes, and (iii) its strong earnings visibility underpinned by significant order backlogs and a strong pipeline of new projects. Upgrade to OUTPERFORM from MARKET PERFORM.

Risks to our call include: (i) volatility in input costs and end-product selling prices, (ii) rising input costs; and (iii) the delay in the rollout of water infrastructure projects.

Source: Kenanga Research - 24 Nov 2023