Investment Highlights

• We maintain our UNDERWEIGHT call, forecasts and FV of RM0.26 based on 8x FD CY19F EPS of 3.2 sen, in line with our benchmark forward P/E of 8x for small-cap construction stocks.

• We came away from Econpile’s briefing yesterday feeling cautious on its outlook. Having unexpectedly dipped into the red in 2QFY19, Econpile guided for no immediate sharp rebound in profitability in the coming quarters due to the sustained weakness and “uncertainties” in both the infrastructure and building segments.

• In order to get the piling industry out of the doldrums, it believes that at some point, the government will have to revive certain suspended mega projects (such as the East Coast Rail Link) and resume the rollout of new public jobs. The piling industry will also not do well without a healthy property market (new property projects generate piling jobs, while good take-up for the properties ensures strong cash flows for developers, and hence certainty in payments to piling contractors).

• Econpile elaborated on the RM33.9mil cost overrun and RM15.1mil trade receivable impairment it announced in the 2QFY19 results two days ago. The cost overrun came largely from: (1) the cost of “idling time” (due to design changes and temporary work suspension) it had not been able to claim from the MRT2 and East Klang Valley Expressway projects; and (2) the downward adjustments in expected profits from a property piling job.

• On the other hand, the trade receivable impairment arose from a client (property developer) being put under receivership by a bank. The amount represented outstanding progress billings (with post-dated cheques issued) and retention sum from a RM64.5mil substructure job for a high-rise property project awarded to Econpile in 2014 which Econpile subsequently completed it in 2016. Econpile had initially received regular progress payments from the client.

• Econpile believes that it stands a good chance of recovering the amount at some point due to two reasons: (1) the client’s loan from the bank of RM50mil is secured against the project land with an estimated market value in excess of RM100mil; and (2) the substructure work is completed and sealed, and hence relatively “deteriorationproof”.

• 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 11–21x forward earnings on muted earnings growth prospects.

Source: AmInvest Research - 27 Feb 2019