This article first appeared in The Edge Financial Daily, on April 11, 2016.

KUALA LUMPUR: Steel and ductile iron piping supplier cum distributor Engtex Group Bhd, which has seen its earnings sliding for the past two consecutive financial years, expects to see better results in its financial year ending Dec 31, 2016 (FY16), as it expects resilient demand from the infrastructure market to lift its earnings.

After its FY13 earnings jumped 75.6% to RM51.22 million from RM29.17 million in FY12, Engtex’s FY14 net profit came in 14.8% lower at RM43.63 million. It dipped again last year by 7.6% to RM40.34 million, as revenue came in lower by 1.5% to RM1.16 billion, from RM1.18 billion previously.

“People have been saying that the economy is slowing down, but what I notice is that infrastructure [projects] are still moving. From our side, there are new orders coming in every month,” said Engtex managing director Datuk Ng Hook in a recent interview with The Edge Financial Daily.

As such, Ng said Engtex has managed to replenish its order book monthly, and maintain its tally at around RM95 million.

The recent recovery in steel prices, albeit a slight one, has also improved the prospects for the group, as steel is the main raw material in Engtex’s production. This means that when the cost of the material rises, its end products can then be priced higher too, said Ng. The reverse is also true.

So the group is expecting better margins — which are hovering at around 15% currently — at least as far as the first financial quarter ended March 31, 2016 (1QFY16) is concerned. Ng said Engtex usually buys its raw materials one to one-and-a-half months ahead of production.

“When we bought our raw materials, prices were relatively higher than the point of time when we sold, so we had to price our products [down], according to market price. Not only that, we also had to write down our inventory value,” he said of the impact of the slump in prices last year on the group’s balance sheet.

Based on the group’s 4QFY15 financial results, Engtex had to write down RM2.96 million worth of inventories that quarter due to falling steel prices.

That, coupled with softening market demand of certain metal-related trading products and lower contribution from its property development division, caused the group’s net profit for 4QFY15 to shrink 77.8% year-on-year to RM990,000 from RM4.46 million, even though revenue gained 2.6% to RM292.34 million from RM284.95 million.

“Lower selling price during that quarter had eaten into our margin. But the good news is [that] we saw some recovery in 1QFY16, but we do not know how long it will last,” he said, but declined to provide any further guidance for Engtex’s unaudited financial results for the said quarter.

Meanwhile, if it’s of any indication of its confidence in the coming months, Ng said Engtex will be spending RM10 million for capital expenditure in FY16 to upgrade its production line, in anticipation of “upcoming demand”.

“We want to upgrade the ductile [iron] pipe that we can produce, from 800mm to 1,200mm, to prepare for upcoming demand, not only for the Langat 2 [water] treatment plant — that is a bigger project, that is why everybody is keeping their eyes on it — but we are also seeing some active demand in other states as well,” he said.

“In the pipe manufacturing business, to extend product range, from upgrading to test run, [and] until we do the marketing to promote our products, these could easily take about two years,” he said, adding that this would mean early preparation pays off.

“Not only that, [pipe traffic] consumption is also getting higher, especially in sewerage, whereby government has been encouraging the use of bigger pipes in the main piping network, while cutting down smaller pipelines, to ease maintenance work,” Ng said.

Ng, however, is quick to point out that Engtex’s prospect does not only lie with infrastructure projects from the public sector, but also recurring orders from the private sector.

Engtex’s piping supply business can be divided into two divisions, namely wholesale & distribution (W&D), and manufacturing.

Ng explained that orders from W&D are mainly derived from the private sector, while orders in the manufacturing division mostly come from the public sector.

For FY15, 62.6% of Engtex’s total revenue was contributed by its W&D division, and 33.8% from manufacturing; the remaining 3.6% was attributable to its property development business.

Although the W&D division represents the largest portion of Engtex’s total revenue, Ng conceded that the margin from this business is relatively smaller compared with its manufacturing division.

Going forward, Ng remains confident that Engtex’s prospect is bright, and opined that the group’s share price should be trading at double-digit price-earnings ratio (PER).

“I still think we should [be at] a PER of more than two digits, not to mention that our NTA (net tangible asset) is at RM1.60 per share [as at FY15],” he said.

Last Friday, Engtex shares closed at RM1.19, down one sen or 0.8%, giving it a PER of 8.75 times and valuing the group at RM360.46.