Engtex: A Genuine Technical Breakdown?

Background

Engtex Group Bhd ("Engtex") is involved in the following businesses:

1) Wholesale and distribution of pipes, valves, fittings, plumbing materials, steel related products, general hardware products, construction materials and bitumen materials.

2) Manufacture and sale of steel and ductile iron pipes and fittings, valves, manhole covers, hydrants, industrial casting products, welded wire mesh, hard-drawn wire and other related products.

3) Property development & hotel operation

Diagram: Engtex's business segmental revenue

Prospects

In August, JF Apex Securities called a BUY on Engtex, valuing the stock at RM1.60 (here). The analyst highlighted the positive near term prospects of the company due to the following:

• Engtex has secured RM127 million worth of piping contracts from Phase 1 & 2 of the Langat 2 water treatment plant project. It is looking to bid for more jobs from Phase 3 & 4. 
• The Selangor government announced its plan to build two water treatment plants with a combined cost of RM800 million to be completed in end-2017 and 2019.
• Apart from new piping projects, there is also potential for pipe replacement in line with the government’s target to reduce Non-Revenue Water to 25% by 2020. The length of pipes to be replaced was estimated to be about 44,000 km or RM5 billion worth of pipes.

Recent Financial Performance

For QE30/6/2017, Engtex's net profit dropped 24% q-o-q or 34% y-o-y to RM13.6 million while revenue was mixed- up 12% q-o-q but down 4% y-o-y to RM285 million. Revenue rose q-o-q mainly due to the recovery in market demand for certain metal related trading products. However, the profit before tax decreased mainly due to lower gain on disposal of vacant industrial lands of approximately RM1.3 million as compared to RM7.1 million previously. Excluding the sale of vacant industrial lands, Engtex's profit before tax rose from RM17.0 million to RM19.1 million.


Table: Engtex's last 8 quarterly P&L


Graph: Engtex's last 50 quarterly P&L

Financial Position

As at 30/6/2017, Engtex's financial position is deemed satisfactory. Current ratio is adequate at 1.6x while gearing ratio is a bit elevated at 1.1x.

Valuation

Engtex (closed at RM1.12 in the morning session today) is now trading at a trailing PER of 6.3x (based on last 4 quarters' EPS of 17.86 sen). Dividend yield is negligible at less than 1%. Based on low PER, Engtex is deemed fairly attractive.

Technical Outlook

Engtex broke below the wedge or trading range in August. As a result, the stock may test its long-term uptrend line with support at RM1.00 soon. In drawing the uptrend line, I ignored the sharp dip in 2013.


Chart 1: Engtex's monthly chart as at Oct 2, 20147_12.30 (Source: Malaysiastock.biz)

From the weekly chart below, we can see the erratic movement of Engtex share price in the past few months. Prior to the August breakdown, Engtex actually broke above the wedge or trading range in May. I view the erratic movement as a product of the stock finding its "right price level" ahead of the expiration of the warrant. The subsequent drop in the share price is the result of arbitraging activity. In my opinion, Engtex is likely to recover back into its wedge or trading range after the expiry of the warrant (Engtex-WA). [Note: A cheaper entry to Engtex is by way of buying the warrant & then converting it to ordinary share. Engtex-WA is now trading at 25.5 sen or at a discount of 3.5 sen after taking into account its exercise price of RM0.83.]


Chart 2: Engtex's weekly chart as at Oct 2, 20147_12.30 (Source: Malaysiastock.biz)

Conclusion

Based on satisfactory financial performance & decent financial position and attractive valuation, Engtex is a good stock for long-term investment. Its present mildly bearish technical outlook is no doubt a matter of concern. However, I believe the technical breakdown is due to arbitraging activity which should cease once the trading of Engtex-WA has ended on October 9. (Note: The last date of trading is on October 6 while expiry is on October 25).

Note:

I hereby confirm that I do not have any direct interest in the security or securities mentioned in this post. However, I could have an indirect interest in the security or securities mentioned as some of my clients may have an interest in the acquisition or disposal of the aforementioned security or securities. As investor, you should fully research any security before making an investment decision.