There seemed to be some issue with assessing our Engtex post when we published it. If you have troubles accesssing it there, please read it here instead. Apologies for the inconvenience:

Engtex – an overlooked gem?

We at Wizard of Finance believe more in fundamentally good counters over high risk high return counters that could make you a fortune or result in bankruptcy. We believe there are many good fundamental counters listed in Bursa Malaysia that are often overlooked.

Here is our analysis on one such counter, being Engtex.

A little background on Engtex

Engtex is best known as a pipe manufacturer. It is one of the largest pipe manufacturer in Malaysia and is the largest distributor of non-oil & gas pipes. Its four main business segments are manufacturing, wholesale & distribution, property development and hospitality. The biggest contributors to its bottom line are its manufacturing and wholesale & distribution segments

Why we think Engtex has good prospects

1)Good competitive positioning in two of its main bottom line contributors:

a.      Manufacturing – only one of a handful of local manufacturers that can manufacture large diameter pipes (e.g. Mild Steel pipes up to 3-metre diameter). Also embarked on capacity expansion recently which will likely lead to better margins from economies of scale

b.      Wholesale & distribution – has one of the largest distribution network in Malaysia

2)Improving Gross Margins

From 2014 to 2017 (we took the cumulative results for 3 quarters as the latest financial report is the 3^rd quarter results ending September 2017), its gross margins have increased, owing to the economies of scale. This is despite the increase in steel prices, which mean that Engtex is able to pass on the additional costs to its customers.

We note the slight dip in margins from 2016 to 2017 as the margins from 2016 has been exceptionally good. We however believe the margins to maintain at the 17% to 18% level as we believe that Engtex will be able to benefit more cost wise when all of its newly expanded capacity starts contributing.

3)Promise to “reward shareholders”

After the exercise of the warrants upon its expiry, Engtex has a cash pile to reduce borrowings and reward its shareholders. Given that most of its capex has been completed, the management of Engtex has the ability to declare more dividends and buyback shares (both of which seem to be occurring). On 29 Nov 2017, it was the first time that Engtex has declated an Interim Dividend, as Engtex has habitually only declared dividends once a year. Engtex has also been regularly buying back its shares, evident of its commitment to reward its shareholders and its opinion of the undervaluation of the shares.

Quote management of Engtex below:

“We have been habitually paying dividends, but around one sen per share. While we will always invest in our business to remain competitive, we are looking to reward loyal shareholders,” says its founder and managing director Datuk Ng Hook 
(Read more at https://www.thestar.com.my/business/business-news/2017/11/11/engtex-looking-into-higher-dividend/#5PBUVCO6CIEcjwy1.99)

4)A star amongst its peers

So you may be wondering how Engtex is performing in comparison to its peers. When it comes to this, we were actually extremely surprised on how well it is doing compared to all its peers. We note that some of its peers are not solely in the pipe business, however, how well it is doing compared to its peers is also something to take note of. Notice that none of its peers have recorded a positive cumulative result (Trailing 4 quarters). Even better, Engtex currently trades at an undemanding valuation of less than 9x earnings.

5)Potential additional upside – Nationwide pipping projects

Lastly, Engtex stands as one of the largest beneficiary to the nationwide pipping project:

• Under 11^th Malaysia Plan, there are plans to reduce Non-revenue water (NRW) (resulting in replacement of pipes)
• Under Budget 2018, RM1.4 bil allocated to implement the NRW programme
• Potential resolution of Langat 2 in 2018 – the deadline has been pushed back to July 2018. We see that a resolution could be forthcoming post-election.

In conclusion, we think 2018 will be a good year for Engtex. Given its recent lows from the bad market sentiments, we think it is opportunistic to consider Engtex as a potential investment.

Disclaimer: This is not a buy call. Please do your own research before investing.

Cheers,

Wiz_of_Finance

If you are interested in contacting me for more analysis, please contact me at wiz.of.finance@gmail.com

Our previous postings:

Sime Darby demerger

Part 1 - https://klse.i3investor.com/blogs/wiz_of_finance/140175.jsp

Part 2 - https://klse.i3investor.com/blogs/wiz_of_finance/140393.jsp

Revisit - https://klse.i3investor.com/blogs/wiz_of_finance/140972.jsp

SIMEPLT - https://klse.i3investor.com/blogs/wiz_of_finance/140696.jsp

Others - https://klse.i3investor.com/blogs/wiz_of_finance/140213.jsp