Investment Highlights

• We maintain our UNDERWEIGHT call and forecasts, and keep our FV relatively unchanged at RM0.25 based on Econpile’s end-FY19 NTA, adjusted for the worst-case nonrecoverability of RM67.8mil (5 sen/share) outstanding arbitration award from client ASM Development (KL) Sdn Bhd (ASM), the developer of Maju KL, controlled by businessman Tan Sri Abu Sahid Mohamed. We have abandoned THE 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 arbitration case.

• The key takeaways from Econpile’s briefing this morning are as follows:

1. Econpile guided for an order book replenishment target of RM600mil in FY20F;

2. It acknowledged that its margins are on a declining trend going forward due to stiff competition for limited new jobs in the market; and

3. It is confident that it can recover THE RM67.8mil owed by client ASM.

• Econpile has set itself a target for new job wins of RM600mil in FY20F (vs. RM643.7mil achieved in FY19). This compares with our more conservative assumption for job wins of only RM500mil annually in FY20–22F on the back of the slowdown in the local construction market. At present, its outstanding order book stands at RM950mil (Exhibit 1).

• It guided for about RM100–200mil new contracts to come from piling jobs for property projects. It said that property project piling jobs in the market now are predominantly smaller in sizes. It is tendering for “a few” jobs that are in excess of RM50mil, while other contracts are generally at about RM20mil or less.

• As for infrastructure piling jobs, it said those depend on the timing of the rollout of new public projects by the government of which clarity is still lacking. For the East Coast Rail Link (ECRL) project, Econpile said that it had “attended briefing and visited the sites” and has been prequalified to participate in the project. However, it feels that the Chinese turnkey contractor may not kick-start the tendering process anytime soon as it is still “in negotiation” and very much in the planning stage.

• It is also exploring regional markets, particularly, Singapore and Indonesia. It acknowledged that these markets are highly competitive with many international players. Its expectations for margins are lower (vs. mid-teens for local jobs) and it will need to have the scale, and as such only sizeable jobs “make sense”. Its key competitive edge in these markets is its ability (backed by its large piling machines) to do “large-diameter and deep piles”.

• Econpile believes that it could still realise margins in the mid-teens for on-going jobs (secured 1–2 years ago) but it will bid more aggressively for new jobs (i.e. at the expense of margins) given the stiff competition for limited new jobs in the local market currently. This is consistent with our margin assumption in the low teens for Econpile.

• Econpile is confident that it can recover the RM67.8mil owed by client ASM. Its optimism is premised upon the land for the property development project, i.e. the now-halted Maju KL, being “not charged” and could have a market value of RM200–300mil. For now, it has no plan to initiate a liquidation proceeding against the client. It is also not overly concerned about having to make impairment on the amount as it believes the amount has “strong recoverability”.

• 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 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 17–20x forward earnings on muted earnings growth prospects.

Source: AmInvest Research - 30 Aug 2019