Pipe demand will accelerate on Selangor’s renewed NRW reduction drive.

Earnings and valuations yet to fully reflect potentials from Langat 2 and Selangor’s long term NRW reduction drive.

Undemanding valuations still at just 6.6/6.1x FY14/15 PERs; fair value is MYR2.55, pegging to 8x FY15 PER.

What’s New

In view of the current water rationing and critical water shortage (water reserve margin: <1%), the Selangor state government aims to reduce the state’s high non-revenue water (NRW) of 33% within six months. Although Langat 2’s development orders are still pending, it is a matter of timing for construction to start. Also, Selangor’s pipe replacement programme stays high in the agenda, a critical component of the state’s long term NRW reduction drive.

What’s Our View

The potential immediate catalyst for Engtex could come from Selangor’s renewed NRW reduction effort in the coming six months, boosting Engtex’s trading and manufacturing earnings as the government expedites the pipe spending progress.

More importantly, a bigger boost to Engtex’s earnings could stem from: (i) Langat 2, which requires medium-to-large diameter pipes and Engtex is one of the three producers in the country for this size of pipes; and (ii) take-over of the water concessionaires in Selangor, where pipe replacement spending may enter full-swing.

Our projected 2-year net profit CAGR of 10% has yet to account for the potential contribution from Langat 2 and major pipe replacement spending in Selangor. We fairly value Engtex at MYR2.55, pegged to a FY15 PER of 8x (Hiap Teck: 11.0x, Choo Bee: 9.3x). The stock remains undervalued – despite the 101% rise in its share price since we highlighted its potential on 4 July 2013, its present 6.6/6.1x FY14/15 PERs are still undemanding.  

Source: Maybank Research - 3 Apr 2014