This article first appeared in The Edge Financial Daily on June 13, 2018

Engtex Group Bhd
(June 12, RM1.03)
Downgrade to hold with a lower target price (TP) of 99 sen: Engtex Group Bhd’s new steel pipe plant in Kuantan and steel mill plant in Melaka commenced operations with utilisation rates of 2.7% and 10% respectively. The combined revenue contribution from both plants amounted to RM8.2 million or 5.2% of total revenue in first quarter of financial year 2018 (1QFY18).

The management aims to raise capacity utilisation to 50% by year end and expects to break even in one year with expectation of combined RM300 million revenue contribution from both new plants.

Engtex has completed the development of Amanja serviced apartments in Sri Damansara, its final property project. Going forward, the management has no immediate plan for a new development despite having vast land bank. However, the management has noted that assets like hotel and land bank are available for sale at the right price.

The management welcomes the new government as it promotes transparency with more projects expected to be open tender.

Engtex’s current order book stands at RM118 million (mild steel pipes: RM94 million, ductile iron pipes: RM24 million) while tender book is at RM617 million. The management has not seen cancellation of government projects after the change in government. The management expects 2QFY18 to be tough due to lesser working days in view of the Hari Raya Aidilfitri festival and higher raw material prices. In view of higher material prices and competitive market environment, we slash our earnings per share (EPS) forecast for FY18 and FY19 by 21.9% and 20.9% respectively but maintain revenue estimates.

Engtex remains in a good position to benefit from infrastructure and piping projects by both the government and private sectors. Potential catalyst is the government resolving the deadlock in Selangor water asset, paving the way for the state’s pipe replacement project to kick off. We lower our call to “hold” from “buy” with a lower TP of 99 sen (RM1.27 previously) following our earnings downgrade. Our revised TP is now based on a forward price-earning ratio of 10.5 times of FY18 EPS, which is in line with the industry peer average. — JF Apex Securities, June 12