WE CAME away from a recent engagement with Engtex Group Bhd feeling upbeat on its prospects.
More orders. As panel water pipe suppliers of Pengurusan Aset Air Bhd (PAAB), Ranhill SAJ Sdn Bhd and Pengurusan Air Selangor Sdn Bhd (PAS), Engtex is poised for more orders ahead. This follows the recent announcement by National Water Services Commission (SPAN) of an average hike of 25 sen/cu m or ~42% hike in water tariffs effective Feb 1, 2024, for domestic users.
The hike will translate to strengthened cashflows for these water operators, allowing them to kickstart their capital expenditure (capex) programmes in water infrastructure including non-revenue water (NRW) reduction initiatives. Recall, the government targets to reduce the national NRW from 36% in 2021 to 15% by 2049. Also recall, it is estimated that 70%-75% of the current NRW is attributed to issues such as leaks, pipe bursts and damaged fittings.
Orderbook. Engtex revealed that as at November 2023, its orderbook stood at RM229 million (ductile iron [DI] pipes: RM30 million, mild steel [MS]/pilling pipes: RM199 million), while its tenderbook was at RM720 million (DI pipes: RM63 million, MS/pilling pipes: RM657 million). Meanwhile, it believes steel prices have bottomed out and should at least stabilise at current levels.
Asset divestment. We understand that there are plans to divest its non-core assets. The proceeds could significantly reduce its current net debt and gearing of RM495 million and 0.62x as at end of the third quarter of 2023 (3Q23), respectively, and hence lower its finance costs.
Forecasts. We maintain our financial year 2023 (FY23F) earnings forecast but lift our FY24F earnings by 69% to reflect strong pipe orders and overall margins.
Valuations. Consequently, we raise our target price (TP) by 83% to RM1.41 as we recalibrate our price-to-book value (PBV) valuation basis to 0.8x (from 0.4x previously) to reflect sector valuation during the last upcycle in the water in 2014 triggered by the massive RM1 billion Langat 2 water treatment plant with a capacity of 1,130 million litres per day (MLD) following the completion of the Pahang-Selangor Raw Water Transfer project. There is no adjustment to our TP based on environmental, social and governance (ESG) given a three-star rating as appraised by us.
Investment case. We continue to like Engtex for: (i) The huge potential in the water pipe replacement market locally, (ii) its dominant market position in both large- diameter MS pipes and DI pipes, and (iii) its strong earnings visibility underpinned by significant order backlogs and a strong pipeline of new projects. Maintain 'Outperform'.
Risks to our call include: (i) Volatility in input costs and end-product selling prices, and (ii) delay in the rollout of water infrastructure projects.