Brokers Digest: Local Equities – Engtex Group Bhd, Pentamaster Corp Bhd, Karex Bhd, Datasonic Group Bhd

Engtex Group Bhd

Target price: 77 sen OUTPERFORM

KENANGA RESEARCH (NOV 8): Engtex Group Bhd manufactures and distributes various steel products, including mild steel (MS) and ductile iron (DI) pipes, generic wire mesh and steel rebars used in the construction industry. Historically, generic wire mesh, rebars and other steel products contributed about 63% to the company’s manufacturing turnover while pipes made up the other 37%.

Meanwhile, its property development segment, which suffers from low take-up rates, and its hotel operations, which run at low occupancy rates, have been loss-making.

There are several pipe replacement programmes under the 12th Malaysia Plan (12MP). The latest statistics from Suruhanjaya Perkhidmatan Air Negara (SPAN) point to 70% to 75% of non-revenue water (NRW) stemming from leaks, bursts and damages to pipes and fittings. Meanwhile, according to the Malaysian Water Association (MWA), the water distribution network in the country is made up of MS pipes (29.1%), asbestos-cement (AC) pipes (27.1%) and DI pipes (8.0%).

We understand that Engtex is the only maker of large-diameter MS pipes of up to 3m locally, used in upstream water supply projects. It is one of only two producers of DI pipes locally, the other being Penang-based YLI Holdings Bhd. Highly corrosion-resistant, DI pipes are widely used in water distribution.

Year to date, the group has secured new contract wins of RM151 million from the Sungai Rasau Treatment Plant’s main contractors, which are Gamuda Bhd (for Package 1) and Taliworks Corp Bhd (for Package 2 and 3). Currently, Engtex’s outstanding order book stands at RM285 million (DI pipes: RM29 million, MS/pilling pipes: RM256 million) while its potential tender book stands at RM623 million (DI pipes: RM54 million, MS/pilling pipes: RM569 million).

We like Engtex for the huge potential in the local water pipe replacement market, its dominant market position in both large-diameter MS pipes and DI pipes, and its strong earnings visibility underpinned by significant order backlogs and a strong pipeline of new projects.

Risks to our forecasts include volatility in input costs and end-product selling prices, as well as delays in the rollout of water infrastructure projects.


Pentamaster Corp Bhd

Target price: RM4.40 BUY

UOB KAY HIAN RESEARCH (NOV 4): Pentamaster Corp Bhd reported 3Q22 core net profit of RM25 million (2% higher quarter on quarter, 6% higher year on year), which brought core net profit of the first nine months of 2022 to RM68.5 million, higher by 17%, which accounted for 76% of consensus’ and our full-year estimate.

Revenue improvement of 17% y-o-y in 9M22 was predominantly driven by stronger automated test equipment (ATE) sales. Segment-wise, sales were driven by strong demand from the automobile segment, by 1.8 times amid the structural shift towards electric vehicles (EVs), which in turn fuelled the demand for its assembly and testing for front-end to back-end solutions. Core net profit margin improved to 17%, driven by a better product mix in the automobile segment despite the continuous cost challenges brought about by supply chain disruption and bottlenecks.

Solid performance from the automobile segment is in line with the secular automotive electrification trends as well as the group’s timely effort in riding this momentum. Amid this backdrop, Pentamaster has benefited from its broad solution offerings in its automobile test solutions that are highly customised to meet the specific needs of automotive manufacturers globally, from front-end to back-end of the supply chain.


Karex Bhd

Target price: 72 sen ADD

CGS-CIMB RESEARCH (NOV 8): With the easing of lockdown measures around the world, Karex said it had seen a substantial pick-up in demand for its sexual wellness products since 1QFY6/23. To recap, the company previously estimated that global condom usage had declined by up to 40% during the Covid-19 period (1HCY20-1HCY22) due to lower usage patterns. It is set to benefit from the closure of some condom plants globally over the past two years.

Karex has been raising its selling prices by about 8% to 10% over the past two years, yet its margins have declined in the past few quarters as the price hikes were insufficient to pass on the burgeoning costs. However, since 1QFY23, we have begun to see tailwinds emerge in the operating environment, in addition to the weakening of the ringgit (98% of Karex’s sales are export-oriented). Key input and operating (freight) costs have declined since 1QFY23, which is expected to bode well for the company in terms of a recovery in margins.

We think Karex has finally turned the page, backed by multiple tailwinds in the operating environment and recent increases in selling prices.


Datasonic Group Bhd

Target price: 57 sen BUY

MIDF RESEARCH (NOV 8): Datasonic has accepted a letter of award (LOA) from the Ministry of Home Affairs for the supply of 10 million foreign worker cards (i-Kads) to the Immigration Department for a period of 36 months, from Nov 1, 2022, to Oct 31, 2025.

The contract value of RM140 million will include work to upgrade the former i-Kad, which was made of PVC and had standard printing technology, to polycarbonate with a more secure chip and a laser printing system.

As part of the contract, Datasonic will implement the Professional Training and Education for Growing Entrepreneurs (Protégé) programme as set by the government. This will be based on the contract value with the minimum number of participants of 58 persons, at no cost to the government.

The contract win is within our expectations as Datasonic is highly experienced in the identity document (ID) space with an established track record compared to its peers. Additionally, we are optimistic that the group will be able to win contracts for other major upcoming projects such as the Digital MyKad, National Digital ID (e-KYC) and Electronic Medical Records (EMR).


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