Strike while the pipe is hot
- We initiate coverage on Engtex with an Add rating and RM0.75 TP, as we believe the worst is over for the share price; FD CY22-23F P/E is 4.2-4.5x.
- We believe Engtex could be a big beneficiary of the next wave of pipe infrastructure capex cycle and infra rollout, which could occur in 2023F.
- Key risks: weak execution on water sector reform agenda. Re-rating catalysts are trading-driven: new upstream pipe tenders, positives from Budget 2023.
Well positioned for the next wave of pipe infrastructure capex
The likelihood of an improved operating landscape for domestic pipe manufacturers puts the spotlight on Engtex Group, one of the two key players in an essentially duopolistic market. Engtex’s key strength lies in its wide domestic distribution network and sizeable total output capacity of 480k MT p.a. encompassing various steel products and fittings, with its core focus on smaller diameter ductile iron (DI) pipes and larger diameter mild steel (MS) pipes. The group’s pipe products are not only applicable to the water sector but also to the sewerage, housing and infrastructure industries. As at end-Jun 2022, tender book for MS pipes outpaced DI pipes’; higher output tonnage signals steady demand recovery.
Demand drivers are present; order book growth on the cards
Key factors driving demand for Engtex’s pipes include: 1) retainer contract from Perbadanan Asset Air Berhad (PAAB) as an exclusive supplier of various pipe products, 2) pipe capex plans by restructured state water operators, 3) new upstream pipe distribution network in Selangor, led by Sg. Rasau water supply scheme, 4) RM1bn p.a. pipe capex budget in Selangor, 5) nationwide pipe replacement programme, and 6) the 12th Malaysia Plan, 12MP. YTD, Engtex has secured RM151m worth of pipe orders from the Sg. Rasau water project, bringing its outstanding order book to RM285m, with upside
from RM623m worth of new bids as at end-2QFY22.
3-year forward EPS CAGR of 4.9%; core divisions to lead recovery
We project a decent 4.9% 3-year (FY22-24F) EPS CAGR as we forecast weaker yoy core net profit in FY22F to account for the impact of increased operating cost (lower EBITDA margin). We expect Engtex’s two core divisions, wholesale/distribution and manufacturing, to lead a recovery, offsetting the drag from property development and hotel segments.
Initiate with an Add and RM0.75 TP
We initiate coverage with an Add rating and RM0.75 TP, based on a 30% discount (given low liquidity and pre-election uncertainties) to fully-diluted (FD) RNAV/share of RM1.08. Engtex trades at FD CY22-23F P/E of 4.2-4.5x and CY22F P/BV of 0.34x. At the current share price level (flat YTD, but 25% lower than its 52-week high of RM0.75), we believe further downside is limited while risk of weaker earnings in 2HFY22F is largely priced in. In the near term, potential key re-rating catalysts are event-driven: new upstream pipe tenders, positives from Budget 2023. Downside risks: weak execution on water sector reform agenda and delays in pipe contract rollout.
