Results Review

• Excluding a net exceptional gain amounting to RM4.3mn, ENGTEX reported 9MFY19 core net loss of RM2.1mn. This was below our and consensus’s full-year profit forecasts of RM6.8mn and RM6.2mn respectively. The variance was mainly due to: i) soft market demand, and ii) higher-than-expected procurement and operating costs for certain metal related trading products and manufactured steel products.

• YoY, the group recorded core net loss of RM2.1mn in 9MFY19 as compared with core profit of RM16.8mn while revenue dropped 7.9% to RM828.4mn from RM899.5mn. The lacklustre performance was mainly dragged by lower revenue and earnings contribution from both wholesale & distribution, and manufacturing divisions. In addition, the group suffered margin contraction as a result of higher procurement and operating costs in both wholesale & distribution, and manufacturing divisions.

• QoQ, the group registered core profit of RM0.8mn in 3QFY19 versus a core net loss of RM2.8mn a quarter ago while the revenue surged 17.6% to RM299.5mn from RM254.6mn. The better overall performance was mainly due to improved market demand for certain manufactured steel products.

• The group’s net gearing position increased slightly to 0.61x from 0.59x a quarter ago.

Impact

• Following the weaker-than-expected results, we raise production costs assumptions for certain raw materials in manufacturing division. In addition, we lower FY19 to FY21 gross margin assumptions for wholesale & distribution division from 14.0%/14.2%/14.5% to 13.0%/13.2%/13.4% respectively. All in, earnings forecasts for FY19/FY20/FY21 were cut by 57.9%/17.5%/15.4% respectively.

Outlook

• The wholesale & distribution division is expected to remain lacklustre in tandem with persisting weak sentiment in the construction and property market.

• Given that the government may allocate additional fund to the water sector after the potential water tariff hike in next year, we expect the group to be one of the primary beneficiaries due to its dominant position in water pipe manufacturing.

Valuation

• After revising the earnings forecasts, we lower the target price of ENGTEX to RM0.63 (previously RM0.79), based on 0.4x CY19 P/BV (previously 0.5x). The reduction in P/BV multiple is to reflect the cautious outlook for the broader building materials sector. Downgrade the stock from Buy to Hold.

Source: TA Research - 22 Nov 2019