Investment Highlights

• We maintain our UNDERWEIGHT call, forecasts and FV of RM0.35 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.

• Econpile has been awarded a RM209.3mil contract for basement and substructure works of Pavilion Damansara Heights (Phase 2) in Kuala Lumpur. This is in addition to contiguous bored pile walls (RM18mil) and bored piling works (RM122mil) it secured from Phase 2 of the project, and RM570.4mil works it bagged from Phase 1 of the project previously.

• The latest job has boosted its YTD (FY June) job wins to RM506.7mil and helped to sustain its outstanding order book at RM1.1bil (Exhibit 1). We are keeping our forecasts that assume Econpile securing RM500mil new jobs annually in FY19-21F.

• We hold the view that the current slowdown in the local construction industry sector is no ordinary sector cyclical downturn, but a secular change to the sector’s fundamentals, triggered by: (1) a major cutback in public infrastructure spending over the medium term as the government adheres to fiscal prudence; and (2) the permanent reduction in overall margins for players in the absence of high-margin directly-negotiated government jobs, as the government observes higher standards of transparency and accountability in public procurement.

• We are also mindful of the acute oversupply situation in the high-rise residential, retail mall and office segments, which translates to weak prospects in property-related job wins for piling contractors like Econpile. Its valuations are unattractive at 11–13x forward earnings on muted earnings growth prospects.

Source: AmInvest Research - 13 Feb 2019