This article first appeared in Capital, The Edge Malaysia Weekly on February 19, 2024 - February 25, 2024

Target price: RM1.41 OUTPERFORM

KENANGA RESEARCH (FEB 13): Engtex is poised to see more water pipe orders following the recent water tariff hike that will translate into strengthened cash flows for water operators, allowing them to kick-start their capital expenditure programmes.

In addition, firming steel prices will also boost the company’s overall margins. We raise our FY24F earnings by 69%, lift our target price by 83% from 77 sen and maintain our “outperform” call.

As a panel water pipe supplier of Pengurusan Aset Air Bhd, Ranhill SAJ Sdn Bhd and Pengurusan Air Selangor, Engtex is poised for more orders ahead. This follows the recent announcement by the National Water Services Commission of an average hike of 25 sen per m, or about 42% hike in water tariffs effective Feb 1 for domestic users.

The hike will translate into strengthened cash flows for these water operators, allowing them to kick-start their capex programmes in water infrastructure, including non-revenue water (NRW) reduction initiatives. Also recall that it is estimated that 70%-75% of the current NRW is attributed to issues such as leaks, pipe bursts and damaged fittings. Based on our estimate, a 1% drop in NRW would cost roughly RM800 million. Engtex has estimated that there are pipes spanning over 6,292km in urgent need of replacement in Selangor, translating into 350,000 tonnes of pipes with a cost of about RM1 billion.

Engtex revealed that as at November 2023, its order book stood at RM229 million while its tender book was at RM720 million. Meanwhile, it believes steel prices have bottomed out and should at least stabilise at current levels. This is consistent with an 11% rebound in hot-rolled coil prices since the low in late October 2023. Rising steel prices lift the selling prices of Engtex’s steel products (as steel input cost has been locked in), resulting in margin expansion.

We understand that there are plans to divest its non-core assets. The proceeds could significantly reduce its current net debt and gearing of RM495 million and 0.62 times respectively as at end-3QFY23 and hence lower its finance costs. We maintain our FY23F earnings forecast but lift our FY24F earnings by 69% to reflect strong pipe orders and overall margins.

Target price: RM6.46 BUY

RHB RESEARCH (FEB 13): We raise our SOP-based target price for Gamuda from RM5.66. We believe its industrialised building system (IBS) capabilities may position the group to capture data centre opportunities within the Klang Valley with Tenaga Nasional Bhd’s Green Lane Pathway, facilitating the smoother and faster setting up of data centres in the country.

According to the Construction Industry Development Board, AIMS Data Centre awarded Gamuda with a RM170 million job to construct a data centre in Cyberjaya in February 2023 with a completion target by end-2023. While there were no details, we believe the data centre could be the 8mw AIMS Cyberjaya Block 2 data centre where Gamuda is utilising its “Next-Gen Digital IBS” solutions. Profitability-wise, such projects could fetch PBT margin ranging from 10% to 12%, in our view.

Given that Gamuda’s IBS jobs mostly involve its residential plus data centre jobs, we estimate pre-cast order book to be about RM300 million as at end-FY23. Although IBS job orders are modest (at only 1.5% of its order book at end-FY23), we learnt that Gamuda is currently eyeing some data centre jobs within the Klang Valley.

Target price: RM2.40 BUY

MAYBANK INVESTMENT BANK RESEARCH (FEB 13): The award of Kuala Lumpur City Hall’s variation order for LED street light replacement last week positively surprised, as there had been no prior guidance for additional scope of work for ITMAX’s existing contract. Our target price is also nudged 30 sen higher, pegged to an unchanged 24.4 times FY24F PER, a 20% premium to the simple PER average of its comparable peers.

The latest variation order has a stated contract sum of RM47.2 million and from our understanding, will cover the replacement cost of roughly 18,000 street light units in the district. We do not overrule the possibility of further variation orders in the future, as wear and tear sets in for the remaining installed capacity over time.

With works expected to take a minimum of 24 months to complete, we expect it to increase ITMAX’s group turnover by about RM23.6 million per annum for FY24-FY25E. In addition to accounting for general housekeeping adjustments (including the provision for minority interests for its Johor-related joint ventures), we raise its FY24 and FY25 earnings forecasts by 14% and 12% each. We continue to like ITMAX for its cost, security and technical advantages over its peers.

Fair value: RM1.60 HOLD

AMINVESTMENT BANK RESEARCH (FEB 13): We maintain our “hold” call but lower our fair value from RM1.70. We also lower Infomina’s FY24F-FY25F earnings by 4% to reflect a more conservative sales estimate of slower turnkey project recognition from a tender book of RM600 million, which had decreased 12% quarter on quarter on Nov 30, 2023.

Infomina’s outstanding order book as at end-November stood at RM431 million (1.6 times FY24F revenue), in which progressive recognition will be equally spread out in FY24F-FY26F. We understand the mix of the order book is skewed towards the renewal segment, comprising technology infrastructural operations and maintenance/support services. This leads to a book-to-bill ratio of 0.4 times FY24F renewal segment revenue.

Moving forward, Infomina will focus on key markets such as Thailand and the Philippines to provide value-added application programming interface (API) software to existing customers in the renewal segment. Customised to customer needs, it will provide a higher gross profit margin to the group than the turnkey division. Thus, we expect 2HFY24 earnings to be sequentially stronger, especially with contribution from the higher margin renewal segment. Infomina is also targeting the Japanese market with the incorporation of a subsidiary in Japan recently.

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