Investment Merits

• Capitalising on the next wave of the pipe infrastructure capex cycle
• Pipe replacement tenderbook still largely untapped

Company Profile

Founded in 1983, Engtex Group (Engtex) is a leading one-stop pipeline systems provider in Malaysia with well-established manufacturing and distribution divisions. The group mainly caters to the water and sewerage, infrastructure and construction sectors. Engtex is the exclusive pipe distributor for the National Water Asset Management Company (PAAB) in eight states in Malaysia. It is also one of a few domestic players with the ability to manufacture large-diameter pipes. The group ventured into ductile iron (DI) pipe manufacturing in 2002, and is now the larger pipe manufacturer in the duopoly market in Malaysia. Engtex is also one of the largest players for wholesale and distribution in non-oil and gas pipes, valves and fittings (PVF), and construction materials.

Highlights

Leading integrated pipeline systems manufacturer. In terms of market share, Engtex is the bigger player in the duopoly DI pipe segment, along with YLI Holdings (YLI MK). It is able to produce DI pipes of up to 1200nm in diameter for Class 20 to 100 specifications. Engtex is also one of the largest mild steel (MS) pipe manufacturers in Malaysia, with the capability to produce MS pipes of up to 3000nm in diameter. Both pipes are used in the water and sewerage sectors. As such, we are optimistic that the group is well-positioned to tap into new opportunities within the water infrastructure space by improving production output and raising capacity utilisation rates. We also note that it intends to expand in East Malaysia.

Comeback of the pipe theme. The resolution of the water tariff mechanism will likely have positive implications for water infrastructure funding (pipes), as higher water tariffs would improve the cash flow of water operators and resume the delayed pipe replacement plans. Malaysia’s National Water Services Commission (SPAN) announced a 10- 15% bump in water tariff rates for residential users. As such, the water tariff hike that came into effect on 1 Feb 2024 should help with the funding needed by PAAB and state water operators to support pipe replacement and upgrading projects. Engtex should see a pick-up in orders as early as 2H24 or 1H25, being a major supplier of large-diameter water pipes (MS and DI) as well as a supplier of construction materials (wire mesh, steel bars).

Potential pipe replacement programme largely untapped. We expect to see a turnaround in pipe order replenishment rates by 2H24, driven by a potential revival of pipe tenders and a nationwide pipe replacement programme as a result of the water tariff hike. As of March, Engtex has a MYR100m orderbook for its pipe segment. We understand that there are c.45,284km of pipes valued at MYR10bn (27% of total pipes laid nationwide) that are in need of replacement.

Company Report Card

Results highlights. FY23 revenue rose 1.9% YoY to MYR1.5bn, mainly driven by a recovery in market demand for metal-related trading products. However, FY23 EBITDA and core net profit came in at MYR66.0m (-16.4% YoY) and MYR32.4m (-68.9% YoY). The weaker-thanexpected results were primarily due to higher procurement costs (for raw material inventories) and production costs for manufactured steel products, coupled with lower ASPs from increased market competition. Its wholesale and distribution segment (c.47% of group revenue) booked a 3.9% increase in revenue but recorded lower segmental profit (-26.7% YoY) due to the slowdown in the domestic market. The manufacturing segment (c.51.3% of group revenue) saw a decline in both revenue and segmental profit, also due to lower ASPs and higher production costs.

Management. Founder and Managing Director Tan Sri Ng Hook has 40 years of hands-on experience in the hardware and PVF industry. Engtex is led by a dynamic management team with extensive industry experience. Ng Chooi Guan, its Executive Director, has 30 years of experience in the hardware industry. He leads business development, the procurement of new distributorships, and development of in-house brand products.

Investment Case

We expect Engtex to register earnings growth of 150-200% YoY in FY24, owing to the resumption of the pipe replacement programme and its own robust tenderbook. We ascribed a P/E of 15x to FY24F core EPS to derive an FV of MYR1.50. The ascribed P/E is in line with its 5-year historical mean, but at a slight discount to its large-cap manufacturing peer average of 19x. Key downside risks: Delays in pipe replacement projects, inability to secure market orderbooks, and lower-than-expected ASPs.

Source: RHB Securities Research - 15 May 2024