Engtex seen as gaining from S’gor water restructuring

by **Cals** Wed 16 Oct 2013, 13:55

Business & Markets 2013

Written by Cynthia Blemin of theedgemalaysia.com

Wednesday, 16 October 2013 12:03

KUALA LUMPUR (Oct 16): Affin Investment Bank is bullish on Engtex Group Bhd, saying it stands to gain from the imminent restructuring of the water services industry in Selangor.

The research house has issued a non-rated buy call on Engtex at RM1.40, with a fair value of RM2.04.

Engtex, a leading one-stop pipeline system provider in Malaysia, is one of the few players in the country with the ability to manufacture large diameter pipes, said the research house in a note today.

“Engtex is the far larger player in the ‘duopolistc’ DI pipe sector in the country, which can produce up to 800mm diameter DI pipe.

“Given the duopolisctic nature of the industry, as well as Engtex’s current capacity availability, we believe the company is one of the obvious beneficiaries to capitalise on the imminent restructuring of the water services industry in Selangor,” it added.

The research house opined that the company also tends to gain from the potential massive demand from the long overdue and much needed pipe replacement capex cycle in Malaysia.

“Assuming a 25% EPS growth in FY13 to 19.4 sen – which is realistic given that 1H13 EPS of 15 sen already accounts for 79% of the estimate and further assuming 5-10% thereafter, we believe Engtex could deliver a FY12-15 EPS CAGR of 11% to 21.4 sen.

“Ascribing a 10x FY14 PER (which is consistent with our target PER for Choo Bee), we derive an indicative fair value of RM2.04, which translates into a potential capital upside of 46%,” it said.

At current price level, Engtex is trading at an undemanding 5.7x FY14 PER, it added.

Over the past three years, even without the demand spike from the pipe replacement program, Engtex had registered an impressive double digit annual revenue growth with a 3-year CAGR of 15%, it said.

In FY12/12, it noted that sales grew by 16% year-on-year, mainly driven by distribution and property development segments.

It added that PBT has been relatively stable, with margins ranging from 3-5%.

In 1H13, revenue grew by a commendable 23% y-o-y mainly driven by both the manufacturing as well as the wholesale and distribution segments, said the research house.

PBT grew by a stronger 35% on improved margins from both divisions, it added.