Investment Highlights

• We maintain our UNDERWEIGHT call, forecasts and fair value of RM0.17 on Econpile Holdings (Econpile) based on 8x fully diluted CY21F EPS of 2.1 sen, in line with our benchmark forward target PE of 8x for small-cap construction stocks.

• Key highlights from yesterday’s analyst briefing are:
  
  1. Econpile has set a target for new job wins of RM500mil in FY21F (vs. RM315mil achieved in FY20). It said that it is currently at the “tender evaluation” stage for a substructure work package in Cambodia worth about US$100mil (RM417mil), competing against Chinese contractors. Econpile is pursuing the job rather aggressively because if it does get it, the job could help to absorb certain machinery and resources that are sitting idle at present. Econpile indicated that the overall utilisation rate of its machinery has dropped to about 55% at present (from 75% during the peak) against a backdrop of a depleting order book.
  
  2. In addition, it has sensed increased activities in the local property development space, having received more tender invitations for high-rise piling jobs. Econpile said that there are currently at least 10 active tenders in the market, although they are mostly smallish ones worth about RM20mil each for midpriced high-rise property projects. It also said that while there is at least a large one worth about RM100mil from a high-end condominium project, it may not get off the ground immediately as the market condition is still not conducive for this type of product.
  
  3. Econpile does not appear to be very enthusiastic about work packages from the East Coast Rail Link (ECRL) project as the quotations it has seen so far are not attractive. It believes that the right strategy is to go for later packages when prices become more palatable (we believe, as competition eases with most players having already locked in their capacity in earlier packages).
  
  4. Econpile guided for single-digit margins (vs. low teens it used to enjoy) at least during 1HFY21F given various operational restrictions under the new norms that weigh down on efficiency, such as more restricted operating hours, worker density on the site, etc. The situation could be mitigated by better control on capex (and hence depreciation). Our forecasts assume an average EBIT margin of 10% in FY21–23F.

• Meanwhile, Econpile has yet to secure any new job in FY21F. At present, its outstanding order book stands at about RM670mil (Exhibit 1), 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 conservatively assume Econpile to only secure RM300mil worth of new jobs annually in FY21–23F.

• 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 - 28 Aug 2020