•  Econpile’s 1QFY17 net profit added 13.5% Y.o.Y to RM16.4 mln, owing to higher billings from its stronger orderbook, coupled with the higher recognition from ongoing foundation work from property development projects which yields better margins vs. piling work for infrastructure projects. Revenue for the quarter added 12.9% Y.o.Y to RM114.1 mln.

• However, both the reported earnings and revenue came in below our expectations, accounting to 21.7% and 21.6% of our FY17 estimated net profit and revenue of RM75.8 mln and RM528.7 mln respectively.

• Econpile’s gross profit climbed 7.0% Y.o.Y to RM27.1 mln, due to the increase in piling and foundation works (92.2% or RM105.2 mln of the group’s 1QFY17 revenue) which yields higher margins coupled with higher operational efficiency. We think that margins could remain at current levels, premised on the billings from existing projects that were secured over the last two years are mainly piling and foundation works for the property development projects.

• Meanwhile, we expect its EBITDA margin to come in between 22.0%-24.0% (slightly below 24.0% reported in FY16) in both FY17 and FY18 respectively as we anticipate piling and foundation for infrastructure works (which typically yields lower margins) to account to approximately 15%-20% of FY17 total revenue vs. 6.8% of total revenue recorded in FY16. We also note that Econpile has declared a single tier interim dividend of 1.5 sen per share, payable on 21st December 2016.

Prospects

Although Econpile did not bag any major contract in 1QFY17, the recent two contracts secured in October 2016 amounting to RM323.5 mln already accounted to 53.9% of our orderbook replenishment rate of RM600.0 mln for FY17. One of the contracts, valued at RM280.0 mln, also marks the company’s single largest contract secured since listing on 30th June 2014. The award of the new project has ramped-up its total outstanding construction orderbook to approximately RM840.0 mln, implying an orderbook-to-cover ratio of 1.8x against FY16 revenue of RM462.1 mln, which will provide earnings visibility over the next 24 months (see Appendix 1). Following the reiteration of big-ticket projects announced in Budget 2017, we remain sanguine on the group’s orderbook replenishment prospects. We also note that the group is tendering some RM1.00 bln worth of piling and foundation works for both property development and infrastructure projects, predominantly in the Klang Valley. Notable projects in tender include mega transportation projects such as LRT3, KVMRT2, SUKE, DASH and DUKE extension, whilst private sector projects include developments at Jalan Pudu, Pusat Bandar Damansara and Bukit Bintang City Centre. Meanwhile, the group has earmarked approximately RM20.0 mln for CAPEX in FY17 in order to boost its machineries capacity and efficiency.

Valuation And Recommendation

Despite the reported earnings coming in below our expectations, we leave our earnings forecast unchanged. We expect earnings to improve in the coming quarters after five sizable projects were completed during the quarter, whilst several newly secured projects were at the initial stages of construction. Hence, we maintain HOLD recommendation on Econpile with an unchanged target price of RM1.95, given that the recent spike in its share price offers limited upside, in our view. Our target price is derived from ascribing an unchanged target PER of 13.0x to its FY17 EPS of 15.0 sen, which is in line with its peers with similar market capitalisation. A re-rating, however, is in the cards if Econpile is able to surpass our orderbook replenishment target of RM600.0 mln for FY17. As of 1QFY17, Econpile continues to maintain a healthy balance sheet with a net cash position of RM8.4 mln. Risks to our recommendation and target price include inability to meet our targeted orderbook replenishment rate of RM600.0 mln for FY17. Rising raw material prices and labour cost 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 companies in Malaysia and its ability to secure future contracts.

Source: Mplus Research - 24 Nov 2016