Investment Highlights

• We cut our FY19-21F forecasts by 27%, 29% and 32% respectively and reduce our FV by 34% to RM0.35 (from RM0.53) based on 8x FD CY19F EPS of 4.4 sen, in line with our benchmark forward P/E of 8x for small-cap construction stocks. Maintain UNDERWEIGHT.

• Econpile’s 1QFY19 results came in way below expectations at only 17% of both our full-year forecast and full-year consensus estimates. The variance against our forecast came entirely from a steep decline in margins. We have reflected lower margins in our forecasts.

• 1QFY18 topline expanded 19% YoY but EBIT plunged 27% as EBIT margin contracted by 6.8ppts. The company attributed the lower margins to increased infrastructure piling jobs, i.e. 24% of turnover vs. only 17% a year ago (while high-rise property piling jobs made up 76% of turnover, vs. 83% a year ago). Typically, infrastructure piling jobs (for instance, the LRT or MRT lines) command lower margins due to the high idle times for machines as they have to be mobilised to a new spot along the line every few days or weeks, while high-rise property piling jobs stay on the same site throughout the project period.

• Our estimation shows that the change in job mix alone could not have caused the steep margin erosion. We believe there was cost escalation that Econpile had not been able to contain.

• Meanwhile, so far in FY19F, Econpile has secured new jobs worth a total of RM217.1mil, boosting its outstanding construction order book to RM1.1bil (Exhibit 2). Our forecasts assume Econpile to secure RM500mil new jobs annually in FY19-21F. During a recent analyst briefing, Econpile said that it is eyeing, among others, basement work worth about RM200mil from Pavilion Damansara Heights (Phase 2) (PDH2), having already secured two piling packages worth RM140mil from PDH2, and more piling packages from the Gemas – Johor Bahru electrified double track (it already bagged one worth RM34mil from the project).

• On the other hand, there could be erosion to Econpile’s outstanding order book arising from the downsizing of the LRT3 project. Econpile guided for potential reduction of RM30-40mil to its RM209mil piling package for Section GS04 of the LRT3 project, largely arising from the downsizing of the stations.
• We remain cautious on the outlook for the local construction sector. As the government scales back on public projects, local contractors will be competing for a shrinking pool of new jobs in the market. Severe undercutting among the players will result in razor-thin margins for the successful bidders. On the other hand, the introduction of a more transparent public procurement system under the new administration should weed out rent-seekers, paving the way toward healthier competition within the local construction sector.

• We believe Econpile is mitigated by its substantial order backlog that should keep it busy over the next 1-2 years, coupled with its proven ability to compete under an open bidding system. However, valuations are unattractive at 14-17x forward earnings on muted earnings growth prospects.

Source: AmInvest Research - 27 Nov 2018