KUALA LUMPUR (Nov 20): LEAP Market-bound water pipe maker Hydropipes Bhd plans to build up capital to tap into an expected rise in water infrastructure projects.

Water pipe demand has been on an upward trajectory over the past three to four years, according to Hydropipes executive director Datuk David Ang Chin Tat. He foresees this trend continuing with the government’s renewed focus on addressing long-standing issues plaguing the country’s water infrastructure.

“Therefore, I think there is a need to expand to cater to the market’s demand,” he told The Edge during an interview, seeing it as an opportune moment to undertake a LEAP Market initial public offering (IPO) to build up funds.

Hydropipes, operating out of its Subang-based factory, currently operates at around 70% of its production capacity. To further bolster the factory’s utilisation rate, Ang noted the company requires further cash to purchase more raw materials — predominantly steel — and fund working capital.

The IPO — comprising 16 million new shares at 25 sen apiece — is expected to raise RM4 million in proceeds, of which RM2 million is earmarked for the purchase of steel and RM1.2 million for working capital.

According to Hydropipes’ IPO prospectus, the RM2 million will enable the company to purchase 670 tonnes of hot rolled coil — steel sheets — which could translate to additional revenue of RM3.08 million, based on the average price of RM3,000 per tonne for the financial year ended Dec 31, 2023 (FY2023).

Hydropipes registered a 70% jump in net profit for FY2023 to RM2.15 million from RM1.26 million in FY2022, as revenue rose 53.15% to RM26.58 million versus RM17.36 million. Utilisation rate stood at 79.55% in FY2023 and 77.01% in FY2022.

The IPO shares are valued at a price-to-earnings ratio (PER) of 15.3 times based on FY2023 earnings.

There are no other pure-play water pipe manufacturers listed on Bursa Malaysia; however, Engtex Group Bhd (KL:ENGTEX) and YLI Holdings Bhd (KL:YLI) have subsidiaries in the business.

Shares in Engtex, which manufactures water pipes via subsidiaries Allpipes Technology Sdn Bhd and Engtex Pipe Industry Sdn Bhd, are valued at a trailing PER of 29.6 times.

Meanwhile, YLI, with its 51%-owned water pipe trading unit Laksana Wibawa Sdn Bhd, is valued at 3.6 times earnings. Laksana Wibawa ceased its water pipe manufacturing business in October 2023.

Without the one-off gain recognised from the Laksana Wibawa-related land and machinery disposals recognised in the third quarter ended Dec 31, 2023 (3QFY2024), YLI would be loss-making on a 12-month trailing basis.

Hydropipes is expected to be listed on the LEAP Market on Dec 13. Thinkat Advisory Sdn Bhd serves as the company’s adviser and placement agent for the listing exercise.

Beyond its LEAP Market move, Ang plans to see Hydropipes transfer to the ACE Market in three years.

Ang holds confidence in Putrajaya’s efforts to reduce non-revenue water (NRW) — treated water that fails to reach consumers, and therefore are not billed — and said the future of water infrastructure-related players looks bright.

The Ministry of Energy Transition and Water Transformation (Petra) recently launched the Water Sector Transformation 2040 (AIR 2024) agenda which estimated RM10 billion is needed to fund water pipe replacement projects.  

In the near term, Petra Minister and Deputy Prime Minister Datuk Seri Fadillah Yusof said the government plans to reduce Malaysia’s NRW to 31% by 2025 from 37.1% in 2023. NRW for the peninsula stood at 34.6% in 2023.

Among the initiatives, he said the government’s Pipe Replacement Programme will see 1,844km of ageing and critical pipes across Malaysia replaced. For context, Air Selangor’s pipe replacement programme, which began in 2016, has replaced 636.55km of pipes as of March 2024.

According to Ang, there are only 13 National Water Services Commission (SPAN)-certified water pipe manufacturers operating in Peninsular Malaysia, including Hydropipes. He noted demand is more than sufficient for the industry.

Overall, Ang sees the water infrastructure industry on a positive trajectory, pointing to the recent NRW reduction initiative announced as well as the water tariff hike earlier this year.

Earlier this year, Malaysia saw its first water tariff hike in nine years. The tariff was increased by an average of 22 sen per cubic metre — to RM1.65 per cubic metre from RM1.43 per cubic metre.

Previously, SPAN highlighted that the average tariff is still lower than the estimated RM1.75 per cubic metre it costs to supply treated water. The loss-making tariff together with lost revenue from NRW has seen the country’s water infrastructure lack investment to address ageing pipes leading to further leakages.