Engtex Poised For More Pipe Orders; Kenanga Raises Target Price By 83%

Kenanga Research raised Engtex Group Bhd’s FY24F earnings forecasts and target price (TP) as the group is poised for more water pipe orders following the recent water tariff hike.

The research house lifted its FY24F earnings forecasts by 69% to reflect strong pipe orders and overall margin. It also maintained its OUTPERFORM call and FY23F earnings forecast.

“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.

“The upcycle was 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 3-star rating as appraised by us,” it said in its Conviction Call/Company Update today (Feb 13).

Kenanga said it came away from a recent engagement with Engtex feeling upbeat on the group’s prospects.

It said that 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 following the recent announcement by National Water Services Commission (SPAN) of an average hike of RM0.25 per m3 or 42% hike in water tariffs effective 1 Feb 2024 for domestic users.

The research house said the hike will translate to strengthened cash flows for these water operators, allowing them to kick start their capex programmes in water infrastructure including non-revenue water (NRW) reduction initiatives.

Previously, the government targets to reduce the national non-revenue water (NRW) from 36% in 2021 to 15% by 2049. It was estimated that 70% to 75% of the current NRW is attributed to issues such as leaks, pipe bursts, and damaged fittings.

“Based on our estimate, a 1% drop in NRW would cost roughly RM800 million. Engtex estimated that there are pipes spanning over 6,292km in urgent need for replacement in Selangor, translating to 350,000 MT of pipes with a cost of about RM1 billion,” it said.

Engtex revealed that as at November 2023, its order book stood at RM229 million, RM30 million from ductile iron (DI) pipes and RM199 million for large-diameter mild steel (MS) pipes.

Its tender book was at RM720 million, DI pipes raked in RM63 million while majority is from MS/pilling pipes at RM657 million.’

Meanwhile, Kenanga said firming steel prices will also boost its overall margins.

“We believe steel prices have bottomed out and should at least stabilise at current levels. This is consistent with an 11% rebound in hot-rolled coil (HRC) prices since the low in late-Oct 2023.

“Rising steel prices lift selling prices of Engtex’s steel product (as steel input cost has been locked in), resulting in margin expansion.

“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-3QFY23, respectively, and hence lower its finance costs.”

The research house likes Engtex for the huge potential in the water pipe replacement market locally, its dominant market position in both MS pipes and DI pipes, and its strong earnings visibility.

The risks to Kenanga’s call include volatility in input costs and end-product selling prices, and delay in the rollout of water infrastructure projects.

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