Results Highlights

Econpile’s 4QFY16 net profit added 22.1% Y.o.Y to RM17.0 mln on the back of higher billings from the strong orderbook, coupled with the higher recognition from ongoing foundation work on property development projects, which yields better margins vs. piling works for infrastructure projects. Revenue for the quarter climbed 23.6% Y.o.Y to RM128.4 mln.

For FY16, cumulative net profit improved 41.6% Y.o.Y to RM66.0 mln. Revenue for the year increased 7.7% Y.o.Y to RM462.1 mln. Both the reported earnings and revenue came in slightly above our expectations, accounting to 103.0% and 104.1% of our FY16 net profit and revenue forecasts of RM64.0 mln and RM443.9 mln respectively.

Econpile’s gross profit gained 37.7% Y.o.Y to RM110.3 mln on the back of piling and foundation works which yields higher margins and amounted to 97.6%, or RM450.9 mln of the group’s FY16 revenue, coupled with higher operational efficiency. Going forward, we think that margins will remain above its three-year average EBITDA margin of 19.2%, given that the ongoing projects secured over the past year are largely piling and foundation works for property development projects.

Still, we expect its EBITDA margin to come in between 20.0%-22.0% (slightly below the 24.0% reported in FY16) in both FY17 and FY18 as we anticipate piling and foundation work for infrastructure works (which typically yields lower margins) to account for approximately 20% or RM102.2 mln of FY17’s total revenue vs. 6.8% of total revenue recorded in FY16.

Prospects

A total of RM262.5 mln worth of new contracts were secured by Econpile in in 4QFY16, bringing its total orderbook replenishment to RM627.3 mln for FY16 – exceeding our orderbook replenishment assumption rate of RM450.0 mln for FY16. The additional contract came mainly from the RM208.0 mln contract for the piling and substructure works for a mixed commercial development at Jalan Ampang, Kuala Lumpur secured in June 2016. The award of the new projects brings its total unbilled orderbook to RM641.0 mln, implying an orderbook-to-cover ratio of 1.5x against FY16 revenue of RM462.1 mln, which will provide earnings visibility over the next 18 months (see Appendix 1).

We have imputed an orderbook replenishment rate of RM500.0 mln for Econpile for FY17 and we are confident that the group’s orderbook replenishment prospects remain firm, premised to the robust construction sector outlook. We also think that 2H2016 could be an exciting period for the construction industry, given that the several packages under the mega infrastructure projects such as KVMRT2, and LRT 3 have yet out be dished out, whereas several road packages such as the Damansara-Shah Alam Elevated Highway (DASH), Sungai Besi-Ulu Klang Elevated Expressway (SUKE), and Pan Borneo Highway are being rolled-out. Meanwhile, we also note that the group is currently tendering for jobs worth over RM1.0 bln in total value (majority for infrastructure works), predominantly in Klang Valley to further boost its orderbook.

Valuation and Recommendation

We leave our FY17 earnings forecast unchanged. However, we downgrade Econpile’s recommendation to a HOLD with an unchanged target price of RM1.60, after the recent spike in its share price is leaving the stock will limited upside, in our view, as valuations are already fair. Our target price is derived from ascribing an unchanged target PER of 11.0x to its FY17 EPS of 14.4 sen, which is in line with its peers with similar market capitalisation.

At current price of RM1.50, the company is trading at prospective PERs of 10.4x and 10.1x for FY17 and FY18 respectively, which is close to construction industry average of 11.0x-13.0x. A re-rating, however, is in the cards, if Econpile is able to surpass our orderbook replenishment target of RM500.0 mln for FY17. As of FY16, Econpile continues to maintain a healthy balance sheet with a net cash position of RM12.8 mln.

Risks to our recommendation and target price include inability to meet our targeted orderbook replenishment rate of RM500.0 mln for FY17 and rising raw material prices and labour cost that could dampen margins going forward. Any delay in project completion could also damage Econpile’s reputation as one of the leaders in the piling and foundation works segment in Malaysia and its ability to secure future contracts.

Source: M+ Online Research - 29 Aug 2016