Engtex seen as credible play on Selangor water talks

by **Cals** Sat 30 Nov 2013, 17:05

Published: Saturday November 30, 2013 MYT 12:00:00 AM
Updated: Saturday November 30, 2013 MYT 12:36:25 PM
Engtex seen as credible play on Selangor water talks
BY JOHN LOH
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Engtex is said to control about 30% of the mild steel pipe market.

FEW parties can claim to benefit from a political deadlock, but as the talks to restructure Selangor’s water industries edge towards a resolution, pipe makers have emerged as the best proxy to the national water agenda.
There have been several false starts since the first consolidation proposal was mooted in 2008, leaving investors jaded. They may be convinced this time, if the share prices of pipe producers are any indication.
Engtex Group Bhd has soared 94% for the year to RM1.67 as at Thursday. Others, such as YLI Holdings Bhd, JAKS Resources Bhd, Hiap Teck Venture Bhd and Choo Bee Metal Industries Bhd, gained 163%, 49%, 63% and 24%, respectively.
The Langat 2 project, touted as the panacea to Selangor’s impending water crisis, will require some 50,000 tonnes of pipes worth RM200mil.
But the real money, according to industry executives, is in the long-overdue replacement of the country’s aging water pipelines.
Of the 130,000km of pipes in Malaysia, a third are made of asbestos cement, which has been known to cause cancer, says Engtex chief financial officer Khoo Chong Keong.
“Most of them were laid during the colonial period. Assuming that just half of the asbestos cement pipes are replaced with mild steel and ductile iron pipes, we’re looking at a potential RM5bil market,” he says.
A recent expose by The Star revealed that old and leaking pipes are taking a huge toll on the country, with nearly two trillion litres of treated water lost to seepage, poor water quality and disruptions last year alone.
Malaysia’s non-revenue water (NRW) – water that doesn’t reach the consumer – rose to 36.4% in 2012, which compares dismally to Singapore’s 5%, Japan’s 7%, and even the Philippines’ 11%. Malaysia is targeting to trim NRW to 25% by 2020.
In Selangor, water reserves have stooped to a dangerous 5%, far below the recommended 20% margin.
“If things get worse, we may have to survive on three days of water supply a week,” jokes Datuk Ng Hook, founder and group managing director of Engtex.
“The developers are also complaining. Many projects have stalled because they can’t get approval from Syabas for water supply,” he tells StarBizWeek.
All this, say analysts, puts Engtex on the cusp of a demand upcycle. For its part, the company has been “preparing for this moment for years now,” Ng says.
Engtex started out as a hardware shop in 1983 before Ng decided to take it up the value chain by producing its own pipes.
The firm is today Malaysia’s No. 1 water pipe maker by market capitalisation. It was also the first in the country to manufacture ductile iron pipes, a segment in which it commands half of the market alongside YLI.
In the mild steel pipes business, Engtex is said to hold about 30% of the market, which it shares with listed companies such as YLI, Wah Seong Corp Bhd and Jaks Resources.
Despite an anticipated rise in orders, Ng notes that Engtex is in no danger of a capacity crunch as the utilisation of its ductile iron and mild steel pipe facilities stand at about 33% and 50% respectively, giving them ample room to ramp up production.
According to RHB Research, Engtex’s ductile iron manufacturing breaks even at a utilisation rate of 30%, which would mean that the plant is just scraping through.
Although Ng admits that usage of the ductile iron facility is lower than what he would like it to be, he stresses that production is efficient to the point that a 30% utilisation has been able to sustain the entire cost of operations.
Should production increase, economies of scale will kick in and help reduce unit costs while improving margins from low-single digits currently, Ng says.
Its ductile iron facility is only running on 1½ shifts at present, but can be raised to a maximum of three shifts, Khoo says.
“When production was low, we took steps to upgrade our machinery and reduce manual labour. We’ve shed about 30% of the workforce now and changed the whole production line,” Ng adds.
Multiple catalysts
Engtex is cited as a frontrunner to clinch pipe supply jobs for Langat 2 because of its track record and ties to the firms bidding for civil works on the RM1.2bil water treatment plant which include the likes of Gamuda, MMC and WCT.
Langat 2 will treat raw water sourced from the Titiwangsa range via a 45km underground tunnel as part of the Pahang-Selangor Interstate Water Transfer Scheme.
While no awards have been announced for Langat 2 pending approvals from the state, progress on the tunnel, which is on track to be completed by mid-next year, suggests that Langat 2 needs to start construction by the second half of 2014.
The water treatment facility will likely use mild steel pipes for the upstream portion between Langat 2 and the dam due to their larger size, and thereafter channel treated water downstream to townships and other developments via ductile iron pipes.
Langat 2 isn’t the only large infrastructure job on the horizon for pipe firms. Petronas’ Rapid in Pengerang, Johor, could soak up another 40,000-50,000 tonnes of mild steel pipes worth RM200mil, according to Engtex’s calculations.
The massive RM60bil petrochemical complex is expected to have a multiplier effect on the surrounding areas, catalysing their need for water pipes, Khoo says.
On the east coast, Engtex is eyeing RM100mil in pipe orders for Kuantan Port City, a RM4bil industrial and logistics hub to be developed by 2020.
The pipe replacement market aside, some RM800mil in new pipes will require installing every year to support housing and prominent projects like Johor’s Iskandar Malaysia, Ng notes.
“In any development, utilities such as pipes, roads and telecommunications must come first,” he quips.
While Engtex is heavily dependent on raw material from Megasteel Sdn Bhd, the country’s sole supplier of hot rolled coil, for its mild steel pipes, Ng says the fair pricing mechanism implemented by the Government ensures prices remain stable.
The mechanism essentially stipulates that prices charged by Megasteel is taken from the average steel prices from five countries, plus a margin.
With Engtex shares having run up to their highest since 2005, some analysts feel the stock is fully valued.
In a report last week, Kenanga Research advised investors to “take profit for now” after Engtex’s share price exceeded the brokerage’s fair value of RM1.68.
“While we reaffirm our view that the company’s prospects remain bright in the foreseeable future, we reckon the stock is already fully priced at this juncture as it is already trading at its ‘peak valuation’ of 9.6 times price-to-earnings, or +2 standard deviation,” Kenanga Research says.
It also cautioned that pipe jobs for Rapid and Kuantan Port may not be dished out so quickly. “Timing-wise, even if the award of these projects materialise in the next three to six months, we only expect the contractors to start ordering water pipes at the beginning of 2015 as the initial civil works have to be completed first. Civil works normally take 12-18 months.”
There is also the risk that the Selangor water negotiations could drag on, given that all parties have yet to come to a consensus on valuations.
To Ng, the chances of this round of talks becoming another non-starter are remote.
“Malaysia has under-invested in its water infrastructure. If we put our mind to it, perhaps one day we can drink water straight from the tap,” he says.