PETALING JAYA: Engtex Group Bhd
is well positioned to capitalise on more water infrastructure developments, but the key issue remains the timing of these projects’ rollout, which may impact earnings delivery given the high operating leverage nature of the pipe maker’s business.
CGS International (CGSI) Research said this adding that it has cut the financial year ending Dec 31, 2024 (FY24), FY25 and FY26 earnings per share by 52%, 25% and 6% respectively to account for softening metal prices and lower utilisation.
“We reiterate “add” on Engtex with a lower target price of 85 sen,” it said, adding that the company’s re-rating catalysts included a faster pipe replacement cycle, more water supply schemes and stabilisation of metal prices.
Key downside risks meanwhile were slow project awards, volatile metal prices and weak rollout of water infrastructure projects.
In the report, CGSI Research said despite Engtex’s disappointing third quarter ended Sept 30, 2024 (3Q24) results, it believes the longer-term water sector outlook remains intact, with the recent announcement by Deputy Prime Minister Datuk Seri Fadillah Yusof of a national target to reduce non-revenue water to 31% by 2025 from the current 37.1% (at the point of news announcement, Nov 19 2024).
“This should trigger a more meaningful capital expenditure replacement cycle, which Engtex is well positioned to capitalise on, in our view.”
The research house added that the group is a duopoly supplier of ductile iron pipes, while it has the capacity to manufacture up to three metre diameter mild steel pipes which are typically used for upstream water distribution pipelines.
“The introduction of the Water Sector Transformation 2040 plan on Oct 29 further validates the government’s emphasis on the need for pipe replacements, in our view, which could be expedited as the data centre build out gains traction.”
In addition, CGSI Research said potential order flows for Engtex in 2025 to 2026 could be driven by water projects such as Sungai Rasau, Sungai Langat 2 and the Perak-Penang water transfer scheme.
