ENGTEX has proposed a 3-for-4 bonus share issue. We are neutral on the exercise. It is poised to benefit from the revival of water projects and improved steel product prices. We maintain our forecasts and TP of RM1.41 with OUTPERFORM call. Our TP will be adjusted to RM0.81 post the exercise.

ENGTEX has proposed a 3-for-4 bonus share of up to 414.3m new shares, of which we are neutral and deem unnecessary.

Nonetheless, its near-term prospects are strong, underpinned by an outstanding order book of RM166m (MS pipes: RM120m, DI pipes: RM46m). Meanwhile, its tender book stands at RM403m (MS pipes: RM328m, DI pipes: RM75m).

These numbers are likely to rise over the immediate term as water operators kick start their long overdue water projects on the revival of water projects on stronger finances of water operators following the recent water tariff hikes. These include: (i) non-revenue water (NRW) reduction initiatives or pipe replacement, and (ii) construction or upgrading of water treatment plants (including the consolidation of old and small plants to optimize cost). We understand that water operators are currently identifying old pipes to be replaced and working out the cost to be submitted to the Ministry of Finance (MOF) for approval. According to Malaysian Water Association, water operators have thus far submitted proposals to the MOF for water projects worth ~RM4b. There are also plans to raise water tariffs again within the next two years.

Outlook. ENGTEX, the largest water pipe maker, will benefit from investments to reduce the NRW from 36% in 2021 to 15% by 2049. It is estimated that 70%-75% of current NRW is attributed to leaks, pipe bursts, and damaged fittings.

Fundamentals of water-related stocks have improved following the recent announcement by National Water Services Commission (SPAN) of an average hike of RM0.25/m3 or ~42% hike in water tariffs effective 1 Feb 2024 for domestic users (of which some have not been adjusted in the past four decades). These hikes will strengthen the finances of water operators, allowing them to upgrade and replace old water infrastructure. We expect a pick-up in the award of pipe replacement projects from 2HFY24 as Pengurusan Aset Air Bhd (PAAB) finalises the tenders (that typically take six months to conclude).

ENGTEX will also benefit from stronger steel product prices as steel prices in the international market bottom out (see chart on next page).

Forecasts. Maintained.

Valuations. We also maintain our TP of RM1.41, or ex-bonus TP of RM0.81, based on 0.8x FY24F PBV, which is in line with sector valuation during the last up-cycle in 2014 which was triggered by the massive RM1b Langat 2 water treatment plant with a capacity of 1,130m litres per day (MLD) following the completion of the Pahang-Selangor Raw Water Transfer project. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 4).Our TP will adjust down to RM0.81 post the exercise.

Investment case. We continue to like ENGTEX for: (i) the huge potential in the water pipe replacement market locally, (ii) its dominant market position in both large-diameter mild steel (MS) pipes and ductile iron (DI) pipes, and (iii) its strong earnings visibility underpinned by significant order backlogs and a strong pipeline of new projects. Maintain OUTPERFORM.

Risks to our call include: (i) volatility in input costs and end-product selling prices, and (ii) delay in the roll-out of water infrastructure projects.

Source: Kenanga Research - 10 Jun 2024