ENGTEX (5056) - Engtex - A Pipe of Bargain


Engtex Group Berhad (Engtex - 5056) could see bargaining value emerging at the current market price. Albeit the volatile market sentiment that had been plaguing the global market, Engtex had remained resilient, hovering strongly at the range of RM 1.15.

Local water related infrastructure player are awaiting for more governmental projects in order to see the industry picking up. However, much of the project had been hindered with delays and pull back due to water restructuring exercise between Selangor and the federal government. While most of the water restructuring exercise is completed, the last hurdle remain at the acquisition of water asset from SPLASH (Syarikat Pengeluar Air Selangor Sdn Bhd) due to disagreement in valuation. However, despite the bogging issue, Air Selangor's CEO, En Suhaimi Kamaralzaman is optimistic in resolving this before end of 2016.

While waiting for the issue to be resolved, what are the competitive advantages in Engtex that would keep them afloat until the arrival of prized contract ?


Diversified production

Comparing with other water related infrastructure player in the industry, Engtex provide a wider range of mild steel cement line pipes, ranging from as small as 100mm to 2200mm. Large diameter mild steel pipe will be used for raw water pipes line, transferring water from reservoirs to water treatment plants, while medium and smaller pipes will be used to distribute water from the water treatment plant to the consumers.

While Jaks, YLI and Hiaptek are the closest competitor to Engtex, however, they are not a complete competitor in terms of products offered. Jaks Resources manufacture large diameter mild steel pipes which is used for water transfer between reservoir to water treatment plant while YLI and Hiaptek manufacture smaller diameter mild steel pipe.

Most of the smaller diameter pipes in Peninsula Malaysia is made of asbestos cement, and is more than 30 year old. It is also one of the prime reason for rising NRW (none revenue water) issue due to pipe burst and leakages.

Until the the hurdle in SPLASH is settled, the water pipe maker might not be seeing contract dishing out to replace the smaller diameter mild steel pipes, a contract in which will see approx 6,300 km of pipes to be replaced.

While this might be not too good a news for Engtex, YLI and Hiaptek, Engtex participation in large diameter pipe supplies towards the construction of reservoir will be able to offset loss of revenue from that segment, such as Langat 2 Water Treatment Plant.


Recovering Steel Prices Boost Margin

One of the core reason for Engtex in it's stronger EPS for 1Q FYE 2016 is attributable to better margin from recovering steel prices. For 1Q FYE 2016, most of the revenue is contributed from wholesale and manufacturing division.


Steel plate, beams as well as wire continue to see demand due to imposition of anti steel dumping taxes on china steel imports.

The massive completion of property projects at Klang Valley also boost demands on valves, fittings and joints as well as other steel construction material such as mesh wire and steel bars.

 Technical Outlook

Engtex is very resilient despite the recent volatility in the equity market. Key line support remain at RM 1.10, while RM 1.15 remain as key consolidation price. Resistant will be looking at RM 1.20, and 1.25.

Engtex and Jaks weathered fairly better due to involvement in large diameter pipe. YLI, which produces smaller diameter mild steel pipe will depend on pipe replacement contract once the restructuring exercise is fully completed.

Engtex price chart

Jaks price chart

YLI price chart

Conclusion

Engtex at the current price is a value buy. It's diversified steel products from pipes to valves and construction material cushioned the group through uncertainty in business as well as volatile market outlook.

Underpinned with a better margin due to higher steel prices, increase demand due to anti dumping tax on china imports, growing back log in addressing Selangor water pipe replacement as well as contingency water treatment plant to be built will be the core underlying reason to see the industry picking up in the coming days.

Bone's TP : RM 1.30

ENGTEX (5056) - Engtex - A Pipe of Bargain
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