Investment Highlights

• We cut our FY20-22F net profit forecasts by 52%, 10% and 22% respectively, and downgrade our FV by 14% to RM0.19 (from RM0.22) based on 8x revised FD CY21F EPS of 2.4 sen, in line with our benchmark forward target PE of 8x for small-cap construction stocks. Maintain UNDERWEIGHT.

• Econpile’s 9MFY20 net profit disappointed significantly, at only 50% and 38% of our full-year forecast and full-year consensus estimates respectively. The main culprit was the 2-week impact from the movement control order (MCO) during 3Q which turned out to be much more damaging than expected (and shall continue to wreak havoc in 4Q). We have reflected this in our earnings downgrade.

• Its 9MFY20 topline contracted 23% YoY as construction activities have come to a halt since 18 Mar 2020. We believe, not helping either, was the slow construction activities at infrastructure projects, particularly, the LRT3 (even before the MCO). Comparison at the EBIT level is not meaningful as Econpile made a loss a year ago. In terms of EBIT margin, at 8.4% in 9MFY20, it was a far cry from 16–17% that Econpile used to enjoy during the peak of the previous construction cycle in 2018.

• YTD (FY June), Econpile has only secured new jobs worth RM156.9mil while its outstanding order book stands at RM700mil (Exhibit 2). Econpile has set itself a target for new job wins of RM600mil in FY20F (vs. RM643.7mil achieved in FY19). With only one more month to go before the end of FY20F, this has become a tall order. We therefore cut our FY20–22F assumption for job wins to RM300mil annually (from RM500mil).

• Given the still elevated national debt and the still depressed oil prices (that will hurt petroleum revenues), 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, such as the MRT3 and the KL–Singapore high-speed rail. On a brighter note, Econpile has been pre-qualified to participate in the East Coast Rail Link (ECRL) project. The main contractor of the 640km rail project recently started to dish out subcontracting jobs to local players.

• 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 23–37x forward earnings on muted earnings growth prospects.

Source: AmInvest Research - 29 May 2020