- Syarikat Bekalan Air Selangor Sdn Bhd (Syabas), a 70% subsidary of Puncak Niaga Bhd, plans to increase its capital expenditure for water pipe replacement to RM700 million for this year and next.
- About half of the RM700 million capex for pipe replacement in the next two years will go towards the purchase of pipes.
- Syabas has requested contractors to only use ductile iron pipes. Syabas has appointed Laksamana Wibawa Sdn Bhd, a company linked to Puncak Niaga's executive chairman Tan Sri Rozali Ismail, as the sole supplier of steel and ductile iron pipes. However, Laksamana only has a mild steel pipe plant, so it still needs to source ductile iron pipes from external parties such as YLI Holdings Bhd (YLI) and Engtex Group Bhd (Engtex).
- YLI has been manufacturing such pipes since 1994 and its production capacity stands at 75,000 tonnes per annum. Engtex is able to produce 30,000 tonnes of pipes per annum.
In the past 2 days, YLI has gained 15.1% from RM2.19 (last Friday’s close) to RM2.52 (yesterday’s close) while Engtex has similarly increased by 11.4% from RM1.23 to RM1.37. Which of these 2 companies is a better investment?
Background
YLI is involved in the manufacture of ductile iron pipe & related products. In addition, it has a wholly-owned subsidiary in China that is involve in the production of petroleum coke as well as having a 37%-stake in a water-treatment plant in China.
Recent Financial Results
YLI's latest quarterly result is for QE31/1/2007. For that quarter, its net profit dropped 4.7% q-o-q or 1.8% y-o-y to RM4.2 million while its turnover increased by 0.7% q-o-q or 20.3% y-o-y to RM36.3 million. When we compared the last 4 quarters with the preceding 4 quarters, we can see that its net profit has increased by 6.3% from RM13.7 million to RM14.6 million while its turnover has increased by 23.6% from RM102 million to RM126 million.
Valuation
Based on the last 4 quarters' EPS of 14.8 sen & yesterday's closing price of RM2.52, YLI is now trading at a PE of 17 times.
Potential Impact of Syabas' Capex
We cannot assume that the entire amount of Syabas' next 2 years' Capex will be shared out between YLI & Engtex because I do not believe the slack in their capacity is that substantial. A fairer assumption is that both companies' topline & bottomline may increase by a figure of 20-30%.
For YLI, I shall assume that a slightly higher growth rate of 30% for turnover & net profit, resulting in EPS for FY2007/8 of 19.2 sen. As such, its PE will drop to 13.1 times.
Technical Outlook
From Chart 1c below, we can see that YLI has just broken above its long-term downtrend line at RM2.35 yesterday (April 3). This has also coincided with the breakout above the 1-year trading range of RM1.60-2.40 (see Chart 1b below). Nevertheless, the sharp rise on relatively thin volume might not be sustainable. In fact, at the close of today (April 4), the share price has retraced considerably from the intraday high of RM2.70 to close at RM2.50; thus, forming a 'shooting star'. This potentially bearish pattern could herald some correction ahead. As long as the RM2.35/40 is not violated, the outlook for YLI could be still bullish.
Chart 1a: YLI's daily chart as at April 3
Chart 1b: YLI's weekly chart as at April 3
Chart 1c: YLI's monthly chart as at April 3
2. Engtex
Background
Engtex is involved in the manufacture of ductile iron pipe & related products as well as distribution of pipes, valves & fittings for telecommunication, fire-fighting & air-conditioning systems.
Recent Financial Results
Engtex's latest quarterly result is also for QE31/1/2007. For that quarter, its net profit dropped 64.5% q-o-q or 206% y-o-y to RM1.1 million. Its turnover has similarly dropped by 10.6% q-o-q to RM109.5 million, albeit 27.6% higher than the previous corresponding quarter. The drop in the net profit was attributable to impairment loss suffered by one of its subsidiaries, which amounted to RM1.47 million during that quarter.
When we compared the last 4 quarters with the preceding 4 quarters, we can see that its net profit has increased by 47.7% from RM5.8million to RM8.6 million while its turnover has increased by 27.0% from RM355 million to RM451 million.
Valuation
Based on the last 4 quarters' EPS of 10.4 sen & yesterday's closing price of RM1.37, Engtex is now trading at a PE of 13 times.
Potential Impact of Syabas' Capex
Like YLI, I shall assume that Engtex will enjoy a moderate jump in its pipe-making business. The overall impact on Engtex's topline & bottomline will be smaller as Engtex's distribution business is very large when compared to its pipe-making business. I shall assume a growth of 15% for Engtex, thus resulting in EPS for FY2007/8 of 12.0 sen. As such, its PE will drop to 11.4 times.
Technical Outlook
While, its daily chart seems to show that the stock has broken out of an ascending triangle at the RM1.30 level, its medium- to long-term outlook is still uncertain. Its share price is still trapped within the trading range of RM0.85-1.50 (see Chart 2b below) & its long-term downtrend line is at RM2.95/3.00.
Chart 2a: Engtex's daily chart as at April 3
Chart 2b: Engtex's weekly chart as at April 3
Chart 2c: Engtex's monthly chart as at April 3
Conclusion
Based on technical consideration, YLI looks like a better bet than Engtex. The 2 companies' financial performance is about the same, but Engtex is slightly cheaper than YLI in term of valuation. Nevertheless, YLI with an annual ductile iron pipe-making capacity of 75,000 tonnes may chalk up higher growth going forward as compared to Engtex's annual capacity of 30,000 tonnes. I would prefer YLI to Engtex based on all the above consideration. Good entry level for YLI is around RM2.35/40.
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