Investment Highlights

• We cut our FY20–22F net profit forecasts by 18%, 1% and 1% respectively, trim our FV by 8% to RM0.22 (from RM0.24) based on 8x revised FD CY20F EPS of 2.8 sen, in line with our benchmark forward target PE of 8x for small-cap construction stocks. Maintain UNDERWEIGHT.

• Econpile’s 1HFY20 net profit came in significantly below expectations, at only 38% and 30% of our full-year forecast and full-year consensus estimates. The variance against our forecast came largely from lower-than-expected progress billings.

• Its 1HFY20 top line contracted 22% YoY, we believe, due to slow construction activities of infrastructure projects, particularly, the LRT3. Comparison at the EBIT level is not meaningful as Econpile made a loss a year ago. In terms of EBIT margin, at 9.4% in 1HFY20, it was a far cry from the 16–17% Econpile used to realise during the peak of the previous construction cycle in 2018 when there were plenty of jobs to go around.

• YTD (FY June), Econpile has only secured new jobs worth RM156.9mil while its outstanding order book stands at RM810mil (Exhibit 2). Econpile has set itself a target for new job wins of RM600mil in FY20F (vs. RM643.7mil achieved in FY19). We conservatively assume job wins of only RM500mil annually in FY20–22F on the back of the slowdown in the local construction market.

• 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, Econpile 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.

• 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. Not helping either, is the current political turmoil that is likely to stall the award of public contracts. 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. Econpile’s valuations are excessive at 23–24x forward earnings on muted earnings growth prospects.

Source: AmInvest Research - 26 Feb 2020