Investment Highlights

• We maintain our forecasts and fair value of RM0.21 based on 9x fully diluted FY22F EPS, in line with our benchmark forward target PE of 9x for small-cap construction stocks. There is no adjustment for ESG based on a 3-star rating as appraised by us (Exhibit 4). Maintain UNDERWEIGHT.

• Key highlights from analyst briefing last Friday are:
  1. Econpile guided for RM300mil new jobs in FY22F. This is significantly lower than job wins of RM508.6mil in FY21, but consistent with our assumption of order book replenishment of RM300mil annually in FY22–24F. Thus far in FY22F, it has only secured a smallish RM22.7mil piling job for a new 7-storey building at Tunku Abdul Rahman University College in Setapak, KL, boosting its outstanding order book to RM853mil (Exhibit 1).
  Over the immediate term, Econpile will continue to eye mainly smallish piling/substructure jobs (<RM50mil in terms of size) from private property projects locally (we believe the likes of the Tunku Abdul Rahman University College piling job secured recently).
  Meanwhile, Econpile said that the job flow on the public project front has remained lacklustre, as the rollout of public projects continues to be held back by various administrative challenges and restrictions as the pandemic rages on.
  2. Econpile’s largest ever overseas job, i.e. a US$85.7mil (RM347.6mil) piling and substructure work subcontract for the Naga 3 project backed by MCC International Incorporation Ltd in Phnom Penh, Cambodia, already started contributing since 4QFY21 (Apr–Jun 2021). From the initial billings of about US$2mil/month in 4QFY21, the amount has risen to about US$3mil/month since Sep 2021. With its expanding network and knowledge in the local supply chain and market, Econpile is ready to take on more piling jobs in Cambodia.
  3. Econpile explained that a meaningful improvement in margins (from the still depressed levels currently) hinges on higher productivity (which should be boosted by a workforce that is now 85% fully vaccinated) and stable input costs over the immediate term. Econpile registered an EBIT margin of only about 4% in FY21 (vs. low teens during better times). We assume an average EBIT margin of 10% in FY22–24F.
• We remain cautious on the local construction sector. In the newly unveiled 12th Malaysia Plan where 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 high supply of high-rise residential, retail mall and office segments locally, which translates to weak prospects in property-related job wins for piling contractors like Econpile.

• Econpile’s valuations are rich at 13–16x forward earnings on muted earnings growth prospects.

Source: AmInvest Research - 4 Oct 2021