We believe Engtex Group (ENGT) may be a major beneficiary of water pipe replacement projects in the country, as it still has sufficient production capacity to cater to rising demand. Our sensitivity analysis shows that a 10% increase in its utilisation rate could boost FY13F/14F bottomline by 13.0/12.4% respectively. We value ENGT at MYR2.00.

- Water pipe replacement projects. We think that ENGT, a leading onestop pipeline systems provider in Malaysia, could be a major beneficiary of water pipe replacement projects in the country (as highlighted under the macro overview in our sector report New Opportunities Beckon). The company mainly caters to the water & sewerage, infrastructure and construction sectors and is one of the few players in the country with the ability to manufacture large diameter pipes.

- Sensitivity analysis. As its ductile iron (DI), mild steel (MS) pipes and wire mesh manufacturing lines are running at about 33%, 50% and 73% capacities respectively, we believe it has the ability to ramp up production should the demand for its products increase. Based on our sensitivity analysis, a 10% increase in its utilisation rate could boost FY13F/14F earnings by 13.0% and 12.4% respectively.

- Risks. The water pipe replacement projects may take longer than expected to roll out and earnings could be affected by fluctuating steel prices. Hence, we believe the demand growth may not be enough to offset higher costs of production, should raw material prices rally strongly.

- Valuation. ENGT’s share price has rallied strongly of late and at MYR1.59, the stock is now trading at 10.3x its historical P/E. Our model assumes a conservative 5% growth per annum in its utilisation rate for FY13F and FY14F, in tandem with the steady growth in demand for its roducts, keeping in mind that any potential major contracts wins would significantly boost its earnings. With a MYR2.00 FV, we value ENGT at a 9.5x FY14F P/E, which is +1.5 SD of its 5-year historical trading band, on the back of its strong growth potential.

Source: RHB