We visited Engtex‟s manufacturing plant in Gebeng, Kuantan and were
introduced to the production process of ductile iron (DI) pipe products.
Being the first Malaysian DI pipes producer, the products are marketed
under the brand name of „SUASA UNIK‟, „EDIP and „ENGTEX‟, and are
produced in compliance with the international standards. Our meeting and
plant tour were guided by Dato Ng Hook (Group MD), Mr. Khoo Chong Keong
(CFO) and Mr. Simon Kuah (GM- Gebeng).
Company background. The company was founded in 1983 as a hardware retail shop. Since then, it made tremendous progress to become a diversified integrated wholesale and distribution player. Over the years, it has established itself as manufacturer and provider of quality pipes, valves fittings and steel products mainly catering for the water and sewerage, infrastructure, and construction sector in Malaysia. Main business includes: i) Manufacturing - DI pipes, mild steel (MS) pipes, wire mesh and others; ii) Distribution and wholesale - pipes, valves and fittings (PVF), and iii) Property/Hospitality.
(ii) One of the largest MS pipe manufacturers in Malaysia. Engtex also produces MS pipes up to 2600mm in diameter with about 30% market share (competitor Jaks Resources produces up to 1800mm diameter). Management is targeting to supply its MS pipe ranging from 2200mm-2600mm to the upcoming Langat 2 water treatment plant, estimated to be worth around RM800m.
(iii) Ready to run at full capacity on pipe replacement. Due to high leakage from Asbestos-Cement (AC) pipes, many water authorities in Malaysia have abandoned its use for water supply. There will be approximately 45,000km of pipes to be replaced in Malaysia. 32% of total pipes laid are AC pipes. Assuming the AC pipes are replaced with DI and MS on 50:50 basis, the management has calculated demand for total replacement market amounting to roughly RM5bn. Currently, Engtex‟s plant utilization for DI and MS are at 33% and 53% respectively. Hence, its plants have the capacity to increase production when water reforms and infrastructure related works are carried out in the near future, without incurring new capital expenditure.
(iv) Expanding wire mesh segment. Wire mesh is widely used for concrete slab construction. Due to an uptrend in the sector, the company has recently added 54k tonne capacity in its Gebeng and JB manufacturing plants, and is currently building 18k tonne wire mesh plant in Kota Kinabalu. We understand the plants are strategically located to cater to the specific regions.
(v) Top PVF distributor. Engtex has diverse product mix of more than 5,000 product items and large clientele base exceeding 3,000 customers (i.e. Pengurusan Asset Air (PAAB), Perbadanan Bekalan Air (PBA), Syabas and others). (vi) Property segment to tap into new development areas. Developing 4 projects with total RM700m GDV in Selayang, Kepong and Sg. Buloh. It will continue to grow its business portfolio as management believes the segment can run alongside its wholesale and manufacturing divisions with advantage of inhouse resources.
Investment risks. i) Exposed to metal commodity price volatility; ii) Does not have control over key raw materials for hot rolled coil and steel plates for the MS segment; and iii) Size constraint for DI pipes to a maximum of 800mm in diameter; and iv) Relatively high net gearing of 1.08x but partly mitigated by more than 70% of borrowings are from trade-related activities.
Financials. The company delivered its highest revenue growth since being listed in 2002 with RM920m in FY2012, representing an increase of 16% y-o-y due mainly to the sustainable market demand of certain metalrelated trading products and manufactured steel products. A decline of PBT by 13% during FY2012 to RM42m however was mainly due to increased market competition and softening of international and domestic steel commodity prices especially during 2HFY2012. However, its 1HFY13 revenue grew 23% y-o-y to RM549m largely due to a significant improvement in its manufacturing business. It recorded a commendable PBT growth of 35% y-o-y to RM40m with PAT increasing 28% y-o-y to RM30.4m.
Valuation – fair value of RM1.51. We derive our fair value of RM1.51 for Engtex using PER valuation by ascribing a PE multiple of 6.3x to its FY14F EPS. The PE ascribed is based on Engtex‟s 5-year average traded forward PE. We believe the key re-rating catalyst for Engtex will be the award of the Langat 2 project.
Source: PublicInvest Research - 25 Sep 2013
Company background. The company was founded in 1983 as a hardware retail shop. Since then, it made tremendous progress to become a diversified integrated wholesale and distribution player. Over the years, it has established itself as manufacturer and provider of quality pipes, valves fittings and steel products mainly catering for the water and sewerage, infrastructure, and construction sector in Malaysia. Main business includes: i) Manufacturing - DI pipes, mild steel (MS) pipes, wire mesh and others; ii) Distribution and wholesale - pipes, valves and fittings (PVF), and iii) Property/Hospitality.
Investment merits.
(i) Main player in duopolistic DI pipe sector in Malaysia. Engtex has slightly more than 50% market share with an ability to produce DI pipes ranging from 80mm-800mm in diameter (competitor YLI Holdings produces 100mm-700mm diameter). DI pipe has been recognised as the superior pipe material for water and sewerage as it provides excellent resistance to impact, pressure and corrosion. It is designed for faster, easy installation and is economical as compared to normal pipes that require welding. Management believes DI pipes will be the solution to non-revenue water (NRW) losses as proven in Penang with registered the lowest 20% NRW in Malaysia.(ii) One of the largest MS pipe manufacturers in Malaysia. Engtex also produces MS pipes up to 2600mm in diameter with about 30% market share (competitor Jaks Resources produces up to 1800mm diameter). Management is targeting to supply its MS pipe ranging from 2200mm-2600mm to the upcoming Langat 2 water treatment plant, estimated to be worth around RM800m.
(iii) Ready to run at full capacity on pipe replacement. Due to high leakage from Asbestos-Cement (AC) pipes, many water authorities in Malaysia have abandoned its use for water supply. There will be approximately 45,000km of pipes to be replaced in Malaysia. 32% of total pipes laid are AC pipes. Assuming the AC pipes are replaced with DI and MS on 50:50 basis, the management has calculated demand for total replacement market amounting to roughly RM5bn. Currently, Engtex‟s plant utilization for DI and MS are at 33% and 53% respectively. Hence, its plants have the capacity to increase production when water reforms and infrastructure related works are carried out in the near future, without incurring new capital expenditure.
(iv) Expanding wire mesh segment. Wire mesh is widely used for concrete slab construction. Due to an uptrend in the sector, the company has recently added 54k tonne capacity in its Gebeng and JB manufacturing plants, and is currently building 18k tonne wire mesh plant in Kota Kinabalu. We understand the plants are strategically located to cater to the specific regions.
(v) Top PVF distributor. Engtex has diverse product mix of more than 5,000 product items and large clientele base exceeding 3,000 customers (i.e. Pengurusan Asset Air (PAAB), Perbadanan Bekalan Air (PBA), Syabas and others). (vi) Property segment to tap into new development areas. Developing 4 projects with total RM700m GDV in Selayang, Kepong and Sg. Buloh. It will continue to grow its business portfolio as management believes the segment can run alongside its wholesale and manufacturing divisions with advantage of inhouse resources.
Investment risks. i) Exposed to metal commodity price volatility; ii) Does not have control over key raw materials for hot rolled coil and steel plates for the MS segment; and iii) Size constraint for DI pipes to a maximum of 800mm in diameter; and iv) Relatively high net gearing of 1.08x but partly mitigated by more than 70% of borrowings are from trade-related activities.
Financials. The company delivered its highest revenue growth since being listed in 2002 with RM920m in FY2012, representing an increase of 16% y-o-y due mainly to the sustainable market demand of certain metalrelated trading products and manufactured steel products. A decline of PBT by 13% during FY2012 to RM42m however was mainly due to increased market competition and softening of international and domestic steel commodity prices especially during 2HFY2012. However, its 1HFY13 revenue grew 23% y-o-y to RM549m largely due to a significant improvement in its manufacturing business. It recorded a commendable PBT growth of 35% y-o-y to RM40m with PAT increasing 28% y-o-y to RM30.4m.
Valuation – fair value of RM1.51. We derive our fair value of RM1.51 for Engtex using PER valuation by ascribing a PE multiple of 6.3x to its FY14F EPS. The PE ascribed is based on Engtex‟s 5-year average traded forward PE. We believe the key re-rating catalyst for Engtex will be the award of the Langat 2 project.
Source: PublicInvest Research - 25 Sep 2013
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