Investment Highlights

• We cut our FY19–21F forecasts by 58.1%, 1.3% and 1.6% respectively, reduce our FV by 26% to RM0.26 (from RM0.35) and maintain our UNDERWEIGHT call. Our new FV is based on 8x revised FD CY19F EPS of 3.2 sen, in line with our benchmark forward P/E of 8x for small-cap construction stocks.

• Econpile disappointed us and market expectations in 1HFY19. It slipped into the red with a net loss of RM19.4mil, vs. our full-year net profit forecast of RM63.1mil and the fullyear consensus projection of RM67.7mil. The key variances against our forecast came from a RM33.9mil cost overrun from certain ongoing infrastructure and property projects, and a RM15.1mil trade receivable impairment reported in 2QFY19. We have reflected these in our FY19F forecast.

• The net loss in 1HFY19 contrasts a net profit of RM43.9mil achieved during the corresponding period last year.

• On a brighter note, Econpile earlier this month secured a RM209.3mil contract for basement and substructure works of Pavilion Damansara Heights (Phase 2) in Kuala Lumpur. This was 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 boosted its YTD (FY June) job wins to RM506.7mil and helped to sustain its outstanding order book at RM1.1bil (Exhibit 2).

• We maintain our 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 12–25x forward earnings on muted earnings growth prospects.

Source: AmInvest Research - 26 Feb 2019