Investment Highlights

• We maintain our forecasts and FV of RM0.22 based on Econpile’s end-FY18 NTA, adjusted for a worst-case impairment of RM80.1mil outstanding payment from client ASM Development (KL) Sdn Bhd (ASM) (the developer of Maju KL). We have abandoned earnings-based valuation method for Econpile given its elevated earnings risk following a slew of negative earnings adjustments recently including sizeable cost overrun, a significant receivable impairment and a major contract dispute. Maintain UNDERWEIGHT.

• Econpile has been awarded RM67.8mil plus costs via adjudication proceedings under the Construction Industry Payment & Adjudication Act 2012. The award is in relation to RM80.1mil “progress claims” from ASM (a property development company believed to be linked to businessman Tan Sri Abu Sahid Mohamed), arising from a RM280mil contract awarded by ASM to Econpile in 2016 for foundation and substructure works for a mixed development project called Maju KL near the Sg Besi Toll in KL. The contract is about 80% completed, with an outstanding value of about RM56mil.

• While the latest development is positive to Econpile, we will not count the chickens until the sum is recovered as this could involve liquidation proceedings that take years to complete. We understand that Econpile has not made any impairment with regards to this contract dispute, and hence there will not be any significant write-back even if the sum is finally recovered.

• We acknowledge that the revival of the East Coast Rail Link (ECRL) and Bandar Malaysia projects shall result in more jobs available in the market for local construction players. However, we believe the market has not priced in enough risk premium to reflect:

1. The fact that the latest mega projects are driven by world-class Chinese contractors (and Chinese funding) which probably leaves the local contractors with only low-value/low-margin supporting roles in the projects; and

2. The fact that given the still elevated national debt, the government has no choice but to remain steadfastly committed to fiscal prudence which means the revival of the ECRL project could be a “zero-sum game” as it may impede the government’s ability to implement other public infrastructure projects.

• 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 16–33x forward earnings on muted earnings growth prospects.

Source: AmInvest Research - 25 Jun 2019