Sunday, October 27, 2013

Engtex Group - The king of water pipes

Engtex Group
Current RM1.48
NOT RATED

The domestic larger-diameter pipe industry is set for a demand upcycle and Engtex occupies the throne of the duopolistic supply chain. The Selangor water supply capex and nationwide pipe replacement programmes are key drivers, on top of new economic growth areas. Production ramp-up will drive profits to new highs due to operating leverage. Order backlog is set to surpass the recent high of 10k tonnes, driven by water infrastructure build-out. At 6-7x FD FY14-15 P/E, valuations are very attractive. The group's business could be valued at RNAV of RM3.64/share. With a 30% discount similar to Puncak Niaga, the stock could be worth RM2.55/share, offering 62% upside.


Production ramp-up will drive profits to new highs due to operating leverage. Order backlog is set to surpass the recent high of 10k tonnes, driven by water infrastructure build-out. At 6-7x FD FY14-15 P/E, valuations are very attractive. The group's business could be valued at RNAV of RM3.64/share. With a 30% discount similar to Puncak Niaga, the stock could be worth RM2.55/share, offering 62% upside.

A decade of improvements
Engtex's profit track record has been on the uptrend for the past 10 years but it is only recently that investors are taking notice of the stock. Positive expectations of a resolution to the water restructuring in Selangor are the key trigger point as the demand for larger-diameter pipes will surge as the Selangor state proceeds with its new water infrastructure projects. Of the only two domestic mild-steel (MS) pipe makers, Engtex is the leader due to its capacity to produce bigger pipes.

Production ramp-up is around the corner
Its manufacturing plants have been running at 50% average utilisation rates. With the high possibility that new water infra-related pipe orders will pick up in the next 12-18 months, production ramp-up (i.e. raising average utilisation rates to 70-80%) will mean that operating leverage will kick in and should partially counter the impact of rising costs.

Order backlog to scale new highs
Engtex's order backlog hit a new high of c.10k tonnes in early-2012. There is upside potential as new orders are expected to come from new property developments and commercial areas in the peninsula. This does not include the full potential from Selangor's pipe programme (spillover from the Langat 2 water treatment plant), which translates into c.20k tonnes of new orders worth RM80m-90m, Pengerang (RM200m), Kuantan Port City (RM100m) and Singapore.


Source/Extract/Excerpts/来源/转贴/摘录: CIMB-Research,
Publish date: 23/10/13

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