Investment Highlights

• We fine-tune our FY22–23F net profit forecasts by 1–3% lower and trim our fair value (FV) to RM0.21 (from RM0.22) based on 9x revised fully diluted FY22F EPS, in line with our benchmark forward target PE of 9x for small-cap construction stocks. There is no FV adjustment for ESG based on our 3-star rating (Exhibit 5). Maintain UNDERWEIGHT.

• Econpile’s FY21 net profit missed our forecast and the consensus estimates by 35% and 52% respectively. We believe the variance against our forecast came largely from its inability to operate at optimal levels on the back of various pandemic restrictions and supply disruptions. Nonetheless, its FY21 net profit did improve from marginally above the breakeven point a year ago as it adapted better to operating under the new norms.

• Meanwhile, YTD (FY June), it has only secured one new job worth RM22.7mil (vs. our assumption of RM300mil per annum in FY22–24F) while its outstanding order book stands at RM830mil, which is significantly lower than the RM1.4bil it carried three years ago during the peak of the previous construction cycle in 2018.

• We remain cautious on the local construction sector. In the newly unveiled 12th Malaysia Plan, development expenditure in 2021–2025 is projected at RM400bil, vs. RM248.5bil spent under the 11th Malaysia Plan (2016–2020). However, the spending is likely to be backloaded, i.e. with higher allocation only from 2023 when Covid-19 related spending begins to taper.

• Also, other macro and operational challenges remain aplenty in the sector including high national debt, contractors having to take on operating/commercial risks of mega projects by virtue of a public-private partnership model, intensifying competition (amidst growing presence of foreign contractors especially large state-owned Chinese contractors), and higher operating cost and risk, lower efficiency and supply-chain disruptions as the pandemic rages on.

• 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 high at 14–17x forward earnings as compared to its muted earnings growth prospects.

Source: AmInvest Research - 30 Sept 2021