Potential hike in water tariff a boon for Engtex

CGS-CIMB Research expects better earnings growth for the company, thanks to potential water tariff hike and local infrastructure projects.

PETALING JAYA: Engtex Group Bhd’s earnings growth is expected to accelerate in the financial years of 2024 to 2025 (FY24-25), on the back of a potential water tariff hike and local infrastructure projects.

CGS-CIMB Research said the proposed water tariff hike will be a catalyst for the water sector. According to reports, it will open the doors to bigger and more organised capital expenditure allocations for pipe replacements than the yearly sum of RM1bil from Pengurusan Aset Air Bhd.

“If the tariff hikes materialise, it would accelerate water infrastructure upgrade projects. Engtex, as one of the few domestic players capable of producing larger diameter ductile iron (DI) and mild steel pipes, as well as a supplier of other construction materials, should be a key beneficiary,” said CGS-CIMB Research.

Meanwhile, the research house stated that local steel and pipe prices have largely stabilised in the past four months, which may provide room for margin expansions from the low in 2022 and better earnings visibility.

It added that as of last month, Chinese iron ore pricing has risen 23.8% since May 23.

This would potentially translate into higher local steel prices and provide a short-term boost to Engtex’s margins, given the estimated two-to-three months of raw material inventory kept in hand.

The group has witnessed a 77.9% year-on-year (y-o-y) drop in its core net profit of RM8.6mil for the cumulative nine months of FY23, going below CGS-CIMB Research’s expectations at 59.7% of its FY23 estimates and 65.1% of Bloomberg consensus.

This was largely due to higher-than-expected non-deductible tax expenses of RM2.1mil, coupled with a lower pre-tax profit of RM14mil, resulting in an effective tax rate of 36.4%.“Operationally, Engtex performed with expectations, with revenue of RM1.1bil and an earnings before interest, taxes, depreciation and amortisation of RM48.3mil,” said CGS-CIMB Research.

It upgraded the company to an “add” call with a target price of 82 sen per share, in view of the better operating environment and higher earnings outlook.

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