This article first appeared in Corporate, The Edge Malaysia Weekly, on June 20 - 26, 2016.
FOR years, talk about water pipe makers being the best proxy for the national water agenda has been making the rounds. However, the political deadlock in negotiations between the federal and state governments over Selangor’s water assets has led to investor fatigue. This is reflected in the lacklustre trading activity of such companies as Engtex Group Bhd, Jaks Resources Bhd, Hiap Teck Venture Bhd and YLI Holdings Bhd.
Nevertheless, water pipe makers look set to excite investors again following positive news flows from the recent Asia Water 2016 conference, which saw the government affirming its commitment to the water reform agenda and solving Selangor’s water restructuring exercise this year.
Recent contract wins by Engtex and YLI also sent a positive signal to investors that bigger things are coming soon for players in the sector.
Malaysia reportedly has 44,000km of old asbestos-cement (AC) pipes that have been wearing out over the years. Leaks in these old pipes are the main contributor to the country’s high rate of non-revenue water (NRW) of above 35%.
A major overhaul is urgently needed to solve the problem of water that is produced but lost before it reaches the consumers.
The replacement market is estimated at more than RM10 billion, with half of the old AC pipes expected to be replaced by mild steel (MS) and ductile iron (DI) pipes.
Last month, Engtex secured a RM25 million contract from Syarikat Bekalan Air Selangor Sdn Bhd (Syabas) to supply DI pipes as part of the state’s water pipe replacement programme.
In March, YLI’s subsidiary, Laksana Wibawa Sdn Bhd, was appointed to supply pipes, fittings and related products for the proposed development of the Langat 2 water treatment plant project and water reticulation system in Selangor for RM97.34 million.
Engtex managing director and founder Datuk Ng Hook says the Syabas contract will definitely be positive for the group’s bottom line. The project is expected to have spillover effects on other water pipe makers as well.
“We cannot speculate on the chances of winning future tenders, but we are seeing positive signs with the first tender being awarded,” Ng tells The Edge.
He says the Selangor water pipe replacement programme is worth an estimated RM1 billion, and Engtex hopes to secure a significant portion of it.
“Apart from the RM25 million DI pipe contract, we aim to bid for all tenders to be awarded by Syabas or Pengurusan Aset Air Bhd,” he says.
The group is also actively bidding for jobs from ongoing water pipe replacement programmes in other states. Engtex is the exclusive pipe supplier for six states — Perlis, Perak, Penang, Johor, Negeri Sembilan and Melaka.
“There are very few players that have the capability to supply pipes like us. That’s why we hope to secure a significant share of the market with our financial strength and sizeable capacity. We are also able to supply to states where we are not exclusive [such as Selangor]. It shows our competitiveness and capabilities,” Ng says.
Engtex is now ready to tap the water pipe replacement market. Its DI pipe plant is only 30% utilised, and its MS pipe plant, about 70%.
“We have a proven track record as well as ample pipe capacity to cater for more demand. We are upgrading our plants further to remain competitive,” Ng adds.
Engtex is one the country’s largest manufacturers for DI pipes, which are of smaller diameter, and larger-diameter MS pipes. It operates a DI pipe plant in Gebeng Industrial Estate in Pahang, and a MS pipe plant in Serendah, Selangor.
It is worth noting that Engtex has secured close to RM100 million of contracts out of the RM230 million tendered for the Langat 2 water treatment plant. Of the RM100 million, the company will be delivering RM60 million in the current financial year ending Dec 31, 2016 (FY2016).
Engtex is targeting to grow its top line by 10% to 15% in FY2016, with the water pipe replacement project expected to be a key growth driver, says Ng. While the group will continue to pay dividends to its shareholders, it will focus more on paring its debt this year to lighten its balance sheet, he adds.
“With our current order book of RM109 million and tender book amounting to RM507 million, we are optimistic about a better performance in FY2016 will be better. Our proven track record and reliability will be a plus point to win more contracts in the future.”
Ng says Engtex’s share price performance has yet to reflect its growth potential, especially with the many water infrastructure projects coming onstream.
“Our share price is actually trading below the current net tangible asset value of RM1.65. We believe the current single-digit PER (price-earnings ratio) is quite low and we should be trading at double-digit PER, given our growth story.”
Engtex currently trades at a PER of 8.18 times, compared with Jaks Resources’ 10.14 times, while YLI and Hiap Teck are making losses (see table).
Ng says the new NRW master plan will benefit local pipe players. He believes in the the revival of the water infrastructure theme this year as the NRW problem is getting worse, at 35.6% in 2014.
“The government has indicated that key projects will still have to be implemented, such as Langat 2 and other water treatment plants and pipe replacements, to reduce NRW to 25% by 2020. These have to be done to support future economic development,” he says.
From the point of view of fundamentals, Hong Leong Investment Bank Bhd dealer representative Frank Lin says Engtex is the best stock to buy at the moment, compared with the other water pipe counters.
However, he cautions that the awarding of government contracts is full of pitfalls and surprises. One should also not discount the possibility of imports tilting the balance.
“This is an old problem for the whole nation, not just for Selangor, as many of these pipes were during the colonial days. Given the resources, all the old pipes need to be replaced in all states, but we should not discount the fact that pipes can be imported too,” Lin tells The Edge.
If the authorities are serious about the replacement project, all the pipe makers will get a piece of the action for many years to come, he adds.
“I am of the opinion that the orders will be distributed to most of the pipe makers, although unevenly, to cut the risk of non-performance on the part of the suppliers,” says Lin.
In an April 8 report, CIMB Research analyst Sharizan Rosely said major water pipe manufacturers, including Engtex, YLI, Hiap Teck and Jaks Resources, are likely to benefit strongly from the new NRW masterplan.
“Engtex is already a big potential beneficiary of the larger-diameter pipes needed for the Langat 2 water treatment plant in Selangor. The launch of the master plan could kick off a slew of new pipe replacement works nationwide and will be positive for YLI, Hiap Teck and Jaks too,” he noted.