Affin Investment Research is bullish on Engtex

KUALA LUMPUR: Affin Investment Research is bullish on pipe manufacturer Engtex Group Bhd, which it reckons stands to gain from the ongoing water restructuring story in Selangor.

The research house said the indicative fair value of the stock was RM2.04, and that at its last closing price of RM1.40, Engtex was trading at an undemanding 5.7 times FY14 price earnings ratio.

According to the research house, potential pipe demand in the country is estimated at 100,00km, with Peninsular Malaysia alone having 45,000km of pipeline requiring replacement in the near term.

“Engtex, a leading one-stop pipeline system provider in Malaysia, is one of the few players in the country with the ability to manufacture large diameter pipes. It is the far larger player in the ‘duopolistic’ ductile iron (DI) pipe sector in the country, which can produce up to 800mm diameter DI pipe," it pointed out.

The research house said given the duopolistic nature of the industry, as well as Engtex’s current capacity availability, the company is one the obvious beneficiaries to capitalise on the imminent restructuring of the water services industry in Selangor, as well as the potential massive demand from the long overdue and much needed pipe replacement capex cycle in Malaysia.

“In addition, we understand that Engtex is one of the frontrunners to supply MS pipes (size ranging between 2200mm-2600mm) for the Langat 2 treatment plant,” Affin said.

It added that even without the coming demand spike, Engtex had registered impressive double digit annual revenue growth with a three-year compound annual growth rate (CAGR) of 15%.

It said the company’s 1H13 earning per share (EPS) was at 15 sen, and believes Engtex could deliver a FY12-15 EPS CAGR of 11% to 21.4 sen.

Affin said the Government had allocated RM1.1bil in funds under the 10th Malaysia Plan (2011-2015) to stem losses from non-revenue water (NRW, leakages and burst pipes). In 2010, the country’s water industry is estimated to have lost RM1.7bil to NRW, with Selangor alone losing nearly RM600mil.

“In Selangor, various news flow indicates that negotiations between the Selangor State Government and the Federal Government on the restructuring of the water services industry will likely reach a conclusion by end-2013. In our opinion, a decision will likely be made soon,” it opined.