Investment Highlights

• We cut our FY21–22F net profit forecasts by 19% and 7% respectively (having updated our balance sheet forecasts). We reduce our fair value by 11% to RM0.17 (from RM0.19) based on 8x revised FD CY21F EPS of 2.1 sen, in line with our benchmark forward target PE of 8x for small-cap construction stocks. Maintain UNDERWEIGHT.

• Econpile’s FY20 net profit missed expectations significantly, coming in at only a fraction of our forecast and consensus estimates. The main culprit was the impact from the movement control order (MCO) which turned out to be much more damaging than expected.

• Its FY20 net profit plunged 91% YoY as construction activities came to almost a complete halt during the peak of the pandemic in Mar-May 2020 but Econpile continued to incur certain fixed overheads (such as wages, staff welfare, depreciation, equipment rentals, headquarters expense, etc), severely hurting its bottom line.

• Meanwhile, Econpile has yet to secure any new job in FY21F. At present, its outstanding order book stands at about RM670mil (Exhibit 2), which is less than half of the RM1.4bil it carried two years ago during the peak of the previous construction cycle in 2018. We are keeping our forecasts which assume Econpile will secure RM300mil worth of new jobs annually in FY21–23F which is consistent with its job wins of RM298mil in FY20.

• 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, such as the MRT3 and the KL–Singapore high-speed rail.

• Already, S&P Global Ratings downgraded Malaysia’s outlook to negative from stable on 26 June 2020 to reflect a heightened risk of fiscal deterioration, weighed down by the economic impact of the Covid-19 pandemic, depressed oil prices and fiscal stimulus.

• 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 24–29x forward earnings on muted earnings growth prospects

Source: AmInvest Research - 27 Aug 2020