Engtex Group Bhd reported weaker-than-expected results for the first half of FY24, with core net profit coming in at RM11 million, falling short of projections at 28% of the full-year forecast. This underperformance was largely due to weak sales in the second quarter and the impact of higher-cost inventory. Despite these challenges, analysts have maintained their positive outlook on the company, with calls such as OUTPERFORM remaining unchanged, supported by the expectation of improved performance in the second half of FY24.
The lower-than-anticipated results were driven by a combination of softer market demand for steel products and rising input costs. The company’s revenue for 1HFY24 was relatively flat year-on-year, recording a slight 3% decline. However, the core net profit more than doubled compared to the previous year, thanks to stronger margins from the reduction of high-cost inventory, with impairments dropping to RM1.9 million from RM3.2 million the previous year.
On a quarter-on-quarter basis, Engtex’s core net profit for 2QFY24 fell by 83% due to lower sales volume and pressure on margins from increasing input costs. However, these input costs have since stabilised, which is expected to provide some relief to the company’s earnings moving forward.
Looking ahead, sentiment towards water-related stocks has improved significantly following the announcement by the National Water Services Commission (SPAN) of a 42% increase in water tariffs, effective from February 2024. This tariff hike is expected to boost the cash flows of water operators, enabling them to initiate long-overdue water infrastructure projects, including the replacement of ageing pipes. Engtex, as a leading manufacturer of water pipes, is well-positioned to benefit from these developments, with a surge in pipe replacement orders anticipated by the fourth quarter of FY24, extending into FY25.
Moreover, the recent growth in the number of data centres being established in Malaysia is likely to further drive investments in water infrastructure, as a reliable water supply is essential for cooling these facilities. Engtex’s strong position in the market, particularly in large-diameter mild steel (MS) pipes and ductile iron (DI) pipes, places it in a favourable position to capitalise on these opportunities.
In the short term, the stabilisation of steel prices is expected to bring some stability to Engtex’s earnings, which have been significantly impacted by fluctuations in these prices due to the company’s large revenue base.
