Engtex Group Bhd (Engtex) could expect a pick-up in pipe replacement orders in the second half of financial year 2024 (2H24F) or early financial year of 2025 (2025F) following the recent water tariff hike, according to CGS-CIMB.
“The hike, which we believe is a positive development for Engtex came quicker than we initially expected.
“However, we estimate the planning, tendering and funding process between Pengurusan Aset Air Berhad (PAAB), state water operators, and its contractors will take 3 to 6 months to finalise (before jobs will be up for grabs),” it said in its In its Company Note today (Feb 6).
The hike on water tariff, which came into effect on Feb 1, was announced by National Water Services Commission (SPAN) on Jan 17, was the first hike in over 30 years for some states.
The 22 sen per cubic meter hike is an increase of between 10% and 15% in water tariffs for domestic users such as in residential areas in Peninsular Malaysia and Labuan.
Following the water tariff hike, the research house raised its FY25F core earnings per share (EPS) estimate by 1.6% to account for the faster-than-expected tariff increase and improving operating environment and introduce its FY26F estimates.
“We roll forward our Gordon growth model (GGM) valuation methodology and employ 6.3% FY26F return on equity (ROE), which was previously, 3% LT growth and 8.8%e required rate of return, which we believe better reflects the upcoming infrastructure boom,” it said.
Consequently, CGS-CIMB reiterated our ADD recommendation with a new target price (TP) of RM1.12, implying CY25F P/BV of 0.45x, -0.5 s.d. below its historical mean.
The downside risks to its call are slower-than-expected rollout of infrastructure projects and volatile raw material prices.
The stockbroking firm said aside from the water tariff hike, upcoming rural infrastructure project could be a boon for Engtex, as announced during Budget 2024.
“Among allocations for rural infrastructure upgrades announced during Budget 2024 were RM1.1 billion to resolve water supply issues, particularly in Kelantan (construction of Machang Water Treatment Plant and to replace pipes), Sabah (enhancing water treatment plants) and Labuan (pipe replacements).
“Other allocations are RM1.63 billion for road upgrades (requiring drainage systems) in village and rural areas; and RM939 million to provide water and electricity supply to rural households.”
It also said Engtex’s management remains optimistic about 2H24F as its tender book has expanded in November 23 to RM720 million from RM528 million in December 2023.
“We expect the execution of rural infrastructure projects to coincide with the rollout of private construction projects in 2H24F and revise our 2025F figures slightly to reflect this.
“In line with the likely increase in orders, we expect improvements in mild steel and ductile iron manufacturing utilisation rates to translate into stronger operating margins.
“The gradual uptick in rates since mid-2023 will boost near- to medium-term margins and the overall stabilisation in raw material prices will improve earnings visibility, in our view,” the research house added.
