Results Highlights

• Econpile’s 2QFY17 net profit gained 28.9% Y.o.Y to RM21.4 mln on the back of advanced billings from several existing projects, coupled with recognition from newly secured projects. Revenue for the quarter grew 33.7% Y.o.Y to RM147.9 mln. For 1HFY17, cumulative net profit added 21.7% Y.o.Y to RM37.8 mln. Revenue for the period improved 23.8% Y.o.Y to RM262.0 mln.

• However, both the reported earnings and revenue came in at the low end of our expectations, accounting to 47.8% and 47.0% of our previous FY17 estimated net profit and revenue of RM79.0 mln and RM542.0 mln respectively.

• Econpile’s 1HFY17 gross profit added 12.4% Y.o.Y to RM60.1 mln, owing to the increase in piling and foundation works for property projects which yield higher margins, coupled with higher operational efficiency. As of 1HFY17, 92.3% or RM241.8 mln of the group’s revenue were derived from piling and foundation works on property projects. We think that margins are sustainable at current levels, backed by billings from existing projects secured over the last two years that are mainly piling and foundation works for property development projects.

• Meanwhile, we expect its EBITDA margin to come in between 20.5%-22.5% (slightly below the 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. As of 2QFY17, Econpile continues to maintain a healthy balance sheet with a net cash position of RM31.9 mln

Prospects

We note that Econpile has secured three major contracts in 2QFY17, collectively worth RM481.8 mln. It has also secured a sizeable earthworks contract for a mixed development project in Pavilion Damansara Heights worth RM570.4 mln. The aforementioned contract also marks the single largest piling contract secured in the group’s 30 years operational history.

With the incorporation of aforementioned contract, Econpile’s orderbook replenishment now stands at RM1.05 bln for FY17 (significantly above FY16’s orderbook replenishment rate of RM627.3 mln) and exceeds our orderbook replenishment assumption of RM700.0 mln for FY17. The award of the new project has also ramped-up its total unbilled outstanding construction orderbook to an all-time high of approximately RM1.42 bln, implying an orderbook-to-cover ratio of 3.1x against FY16 revenue of RM462.1 mln, which will provide earnings visibility over the next 2-3 years (see Appendix 1).

We think that Econpile’s prospects remain firm, capitalising on the reiteration of big ticket projects under Budget 2017. The group is tendering for approximately RM1.0 bln worth of piling and foundation works (approximately 30% for infrastructure projects, while the remaining 70% are for work on property development projects), mainly in the Klang Valley. Apart from mega-infrastructure road and transportation projects such as the LRT3, DASH, East Coast Rail Link and DUKE extension, the group is also eyeing on key developments in the Tun Razak Exchange and Bukit Bintang City Centre projects.

Valuation And Recommendation

Despite the reported earnings coming in below our expectations, we raised our earnings forecast for FY17 and FY18 by 12.8% and 18.5% to RM89.1 mln and RM96.8 mln respectively to reflect the stronger-than-expected orderbook replenishment. Consequently, we have also raised our orderbook replenishment assumption to RM1.20 bln in FY17.

We upgrade Econpile to a BUY recommendation (from Hold) with a higher target price of RM2.30 (from RM2.05). Our target price is derived from ascribing an unchanged target PER of 13.0x to its revised FY17 EPS of 17.6 sen, which is in line with its peers with similar market capitalisation.

Risks to our recommendation and target price include inability to meet our targeted orderbook replenishment rate of RM1.20 bln 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 - 23 Feb 2017