Investment Highlights

• We cut our FY20–22F net profit forecasts by 30–33% and reduce our FV by 29% to RM0.24 (from RM0.34) based on 8x revised FD CY20F EPS of 3.06 sen, in line with our benchmark forward target PE of 8x for small-cap construction stocks. Maintain UNDERWEIGHT.

• Econpile’s 1QFY20 net profit came in significantly below expectations, at only 13–14% of our full-year forecast and full-year consensus estimates. The variance against our forecast came largely from the double whammy of slow progress billings and weak margins realised.

• Its 1QFY20 net profit plunged 41% YoY as its top line contracted 32% (we believe, like other contractors in town, it was hurt by the slow progress at the LRT3 project), coupled with a 1.3ppt erosion in its overall EBIT margin from 10.7% to 9.4% (which Econpile attributed to the labourintensiveness of some of its completing projects).

• YTD (FY June), Econpile has secured new jobs worth RM104.6mil while its outstanding order book stands at RM900mil (Exhibit 2). Econpile has set itself a target for new job wins of RM600mil in FY20F (vs. RM643.7mil achieved in FY19).

• During a recent analyst briefing, it guided for about RM100– 200mil new contracts to come from piling jobs for property projects. For infrastructure piling jobs, it said that it depends on the timing of the rollout of new public projects by the government of which clarity is still lacking at present. For the East Coast Rail Link (ECRL) project, Econpile said that it had “attended briefing and visited the sites” and has been pre-qualified to participate in the project.

• We assume job wins of only RM500mil annually in FY20– 22F on the back of the slowdown in the local construction market.

• Given the still elevated national debt, we believe the government has very limited room for fiscal manoeuvre which means that it is unlikely to roll out new public infrastructure projects in a major way over the short term. 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.

Source: AmInvest Research - 28 Nov 2019