KUALA LUMPUR: Engtex Group Bhd is expected to benefit from increased pipe replacements, which could start in the second half of 2024 (2H24), in tandem with a growing focus on water infrastructure in Malaysia.
According to CGS-CIMB Research, the pick-up in pipe replacements orders could even accelerate into 2025 and 2026.
The brokerage said recent water tariff hike would take time to translate into order book flows for Engtex, and a pick-up in orders into 2025 should boost the company’s manufacturing utilisation rates and margins.
“In line with the likely increase in orders, we expect improvements in mild steel and ductile iron manufacturing utilisation rates to translate into stronger operating margins,” CGS-CIMB Research said.
“The gradual uptick in rates since mid-2023 will boost near-to-medium-term margins and the overall stabilisation in raw material prices will improve earnings visibility,” it added.
CGS-CIMB Research reiterated “add” on Engtex, with a higher target of RM1.12, as compared with 82.3 sen previously, implying 0.45 times the estimated price-to-book value for 2025.
It noted Engtex’s tender book had expanded to RM720mil in November 2023 from RM528mil in December 2022, citing that the company’s management remained optimistic about its prospects in 2H24.
“We expect the execution of rural infrastructure projects to coincide with the rollout of private construction projects in 2H24 and revise our 2025 figures slightly to reflect this,” it added.
Last month, the National Water Services Commission announced a 22 sen per cubic metre increase in water tariffs for domestic users in the peninsula and Labuan. For some states, this was the first hike in over 30 years.
For comparison, the average realised tariff in 2022 was RM1.43 per cubic metre.
“This hike came quicker than we initially expected but we estimate the planning, tendering and funding process between Pengurusan Aset Air Bhd, state water operators, and its contractors will take three to six months to finalise,” CGS-CIMB Research said.
It noted that upcoming rural infrastructure projects would be a boon for Engtex.
During Budget 2024, several allocations for rural infrastructure upgrades were announced, including the RM1.1bil to resolve water supply issues, particularly in Kelantan, Sabah and Labuan; the RM1.63bil for road upgrades (requiring drainage systems) in village and rural areas; and the RM939mil to provide water and electricity supply to rural households.
“We lift our financial year 2025 (FY25) core earnings estimate by 1.6% to account for the faster-than-expected tariff increase and improving operating environment,” CGS-CIMB Research said.
“We roll forward our Gordon growth model valuation methodology and employ 6.3% FY26 return-on-equity (previous 5.5% FY25), 3% long-term growth and 8.8% required return, which we believe better reflects the upcoming infrastructure boom,” it added.