Investment Highlights

• We keep relatively unchanged our forecasts and FV of RM0.24 based on Econpile’s end-FY19 NTA, adjusted for a worst-case impairment of RM80.1mil (6 sen/share) outstanding payment from client ASM Development (KL) Sdn Bhd (the developer of Maju KL) under dispute. 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’s FY19 net profit came in broadly within our forecast but missed consensus estimates by a whopping 27%.

• Its FY19 net profit plunged 71% YoY largely due to a RM33.9mil cost overrun from certain ongoing infrastructure and property projects, and a RM15.1mil trade receivable impairment reported in 2QFY19.

• On a brighter note, Econpile has secured new jobs worth RM638.6mil in FY19 (vs. RM473.3mil in FY18) while its outstanding order book stands at RM950mil (Exhibit s2). For FY20–22F, we assume job wins of only RM500mil annually on the back of the slowdown in the local construction market.

• We maintain our view that valuations of construction stocks, Econpile included, have run ahead of their fundamentals in the heat of the euphoria sparked by the recent revival of the East Coast Rail Link (ECRL) and Bandar Malaysia projects.

• We believe the fact remains 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 impedes 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 16–20x forward earnings on muted earnings growth prospects.

Source: AmInvest Research - 29 Aug 2019