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. This is in line with our benchmark forward target PE of 8x for small-cap construction stocks.

• Econpile has proposed a private placement of up to 160.5mil new shares, which is equivalent to 10% of its enlarged share base of 1,605.0mil shares (assuming a full conversion of its 267.5mil outstanding 2018/2023 warrants) at an indicative issue price of RM0.5735/share. The proceeds are earmarked for working capital and partial debt repayment.

• As Econpile’s 2018/2023 warrants with an exercise price of RM1.25 are deep out-of-money, we believe the minimum scenario is more realistic with the issuance of only up to 133.75mil new shares that shall bring in RM75.7mil net proceeds (after deducting expenses incurred estimated at RM1mil).

• We estimate that the proceeds will turn Econpile's net debt and gearing of RM57.6mil and 0.15x as at June 2020 to a net cash of RM18.1mil. Meanwhile, based on our calculation, the new shares will only dilute its FY21F EPS by 1% as an 8% expansion in the enlarged share base is offset by an 8% earnings enhancement arising from interest savings (based on an interest rate of 4% as per the company’s guidance).

• We are slightly taken aback by the company’s surprise move to raise fresh equity (which could be an indication of a tight cash flow situation). However, if it does manage to strengthen its balance sheet by raising fresh equity at an indicative issue price that translates to 27x fully diluted forward earnings (based on our forecasts), we see this as a positive development to the company.

• 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 in 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 22–26x forward earnings on muted earnings growth prospects.

Source: AmInvest Research - 17 Sept 2020