This article first appeared in The Edge Financial Daily on November 26, 2019

Engtex Group Bhd
(Nov 25, 58 sen)
Maintain hold with an unchanged target price (TP) of 66 sen: Engtex Group Bhd’s third quarter of financial year 2019 (3QFY19) net profit dropped 63% year-on-year (y-o-y) to RM1.1 million as the company was hit by a double whammy of lower demand as a result of weak market conditions, and higher material and operating costs as well as a higher tax rate.

Its quarterly revenue declined 5% y-o-y to RM299.5 million due to lower contribution from the wholesale and distribution (-8% y-o-y to RM170.3 million), manufacturing (-11% y-o-y to RM111.8 million) and hospitality (-10% y-o-y to RM2.6 million) divisions. Its property development sales grew over 16 times to RM14.7 million thanks to higher property sales from the Amanja project in Kepong, with units sold at 72.3% versus 56.7% in 2018.

The wholesale and distribution division, Engtex’s biggest earnings contributor, saw operating profit dropped 52% y-o-y and 42% quarter-on-quarter (q-o-q) to RM7.1 million due to weakened demand and higher material cost. However, the manufacturing division lifted operating profit by 15% y-o-y and 110% q-o-q to RM8.2 million.

Engtex’s overall 3QFY19 revenue and net profit grew 18% q-o-q and 13% q-o-q respectively due to improvements in all business divisions. Its cumulative nine months of financial year 2019 (9MFY19) net profit declined 88% y-o-y to RM2.2 million and achieved only 35% of our full-year forecast, no thanks to a higher material cost and a sales decline. Its 9M revenue was within forecasts after making up 74% of our full-year estimate.

We are reducing our FY19 earnings per share (EPS) estimate by 40% to factor in higher costs and tax, while keeping our FY20 EPS forecast amid a challenging outlook in the absence of major water projects. We are keeping our recommendation at “hold” with an unchanged TP of 66 sen based on 0.4 times FY20 forecast price-to-book ratio. Potential rerating catalysts include an acceleration of government water infrastructure projects and the possibility of a water tariff hike. — JF Apex Securities, Nov 25