Kenanga Research expects Engtex Group Bhd’s earnings momentum to continue improving, supported by recovering margins, stronger demand for water infrastructure projects and a growing pipeline of potential mega contracts.
The research house maintained its “OUTPERFORM” recommendation on Engtex with a target price of RM0.51, supported by the group’s dominant position in large-diameter mild steel (MS) pipes and ductile iron (DI) pipes.
Kenanga said Engtex’s cost pressures have eased after the group successfully cleared high-cost inventory by the end of the third quarter of financial year 2025 (Q3FY25).
The group’s core net profit (CNP) margin turned positive at 3% in Q1FY26, compared with a loss-making position a year earlier, driven by improved inventory costs and stronger contribution from DI pipes, which generally command wider margins.
Moving forward, quarterly earnings are expected to improve sequentially, supported by the recovery in water infrastructure demand following the post-festive season slowdown and higher utilisation rates.
Engtex’s utilisation rate increased to 42% in Q1FY26, compared with 37% in the same period last year.
Kenanga added that margins could see further upside as the group increases local sourcing, which currently accounts for around 40% of materials, helping reduce exposure to foreign exchange fluctuations.
Mega Water Projects Key Growth Catalyst
The research house highlighted that Engtex’s existing order book stands at RM109 million, comprising 71% MS pipe orders and the remaining 29% from DI pipes.
Its outstanding tender book has expanded significantly to around RM1 billion, with about 90% comprising MS pipe projects.
The tender pipeline includes several sizeable contracts exceeding RM100 million, including projects in Sungai Rasau, Pahang and Kuantan.
Kenanga expects three major water infrastructure projects worth a combined RM1 billion to be finalised in the second half of calendar year 2026 (2HCY26), with potential contract awards flowing into 2027.
The projects include:
- Perak-Penang water supply scheme
- Sungai Langat Phase 2
- Sungai Rasau Phase 2
The research house believes Engtex is well positioned to capture a meaningful share of these projects, given its status as one of the few local players capable of supplying large-diameter DI pipes.
Historically, the company has achieved a win rate of around 60% for such projects.
Data Centre Exposure Provides Additional Upside
Kenanga noted that Engtex has also participated in data centre-related developments, mainly through supplying MS pipes for water cooling tower applications and wire mesh products for construction activities.
However, the research house believes water infrastructure projects will remain the main earnings driver in the near term due to their larger volume contribution and stronger margins.
Any significant data centre-related contract wins would provide additional upside to earnings forecasts.
Valuation Remains Attractive
Kenanga made no changes to its order win assumptions pending further clarity on upcoming mega project awards.
The research house maintained its RM0.51 target price, incorporating a 3% environmental, social and governance (ESG) premium based on Engtex’s three-star ESG rating.
Kenanga said its positive view on Engtex is underpinned by:
- Strong potential from Malaysia’s water pipe replacement market
- The company’s leading position in large-diameter MS and DI pipes
- Strong earnings visibility from its order backlog and project pipeline
Key risks include volatility in raw material costs, fluctuations in selling prices and delays in water infrastructure project implementation.
