Results Highlights

• Econpile’s 2QFY18 net profit added 6.4% Y.o.Y to RM22.7 mln on the back of higher recognition from its increased orderbook, coupled with higher gains from disposal of machineries and rental income of equipment. Revenue for the quarter climbed 9.7% Y.o.Y to RM162.2 mln.

• For 1HFY18, cumulative net profit gained 16.2% Y.o.Y to RM43.9 mln. Revenue for the period improved 26.4% Y.o.Y to RM331.1 mln. The results were within expectations with its revenue amounting to 46.0% of our full-year forecast of RM719.6 mln, while its net profit came in at 45.5% of our FY18 estimate of RM96.5 mln. The slight variance was mainly due completion of certain projects, whilst several projects are at the commencement stage.

• Econpile’s 2QFY18 gross profit slipped 0.4% Y.o.Y to RM32.9 mln on higher recognition from piling and foundation works for infrastructure projects that typically yield lower margins. Despite that, piling and foundation works from the property projects continues to anchor the group’s revenue, amounting to 74.9% or RM121.4 mln of the group’s total revenue in 2QFY18. Going forward, we expect margins to drift lower as piling and foundation work on infrastructure projects accelerate.

• We expect its EBITDA margin to come in between 22.0%-23.0% (slightly below the 23.6% reported in FY17) in both FY18 and FY19 respectively as we anticipate piling and foundation for infrastructure works to account to approximately 20.0% of FY18’s total revenue vs. 8.5% of total revenue recorded in FY17. As of 1HFY18, Econpile continues to maintain a healthy balance sheet with a relatively low net gearing of 0.1x.

Prospects

Econpile has secured some RM441.9 mln worth of projects YTD, of which RM289.5 mln was secured in 2QFY18. Consequently, the group’s orderbook replenishment makes up to 73.7% of our orderbook replenishment target of RM600.0 mln for FY18 (see Appendix 1). We expect the aforementioned figure to be achievable, premised to the group’s tenderbook of over RM1.00 bln worth of piling and foundation works.

Backed by an unbilled construction orderbook of approximately RM1.27 bln from over 20 ongoing projects, notably on the Klang Valley Mass Rapid Transit 2, Sungai Besi – Ulu Kelang Elevated Expressway and Pavilion Damansara Heights (see Appendix 2), we believe the group is capable of delivering strong performances over the foreseeable future. Econpile’s orderbook-to-cover ratio at 2.2x against FY17 revenue of RM581.9 mln will continue to provide earnings visibility over the next 2-3 years.

We remain positive on Econpile’s prospects as a niche construction player, specialising in piling and substructure work. Over the years, the group has been taking up deeper job packages that provide better margins, as deep as 37m below ground – which works out to be approximately 11 basement levels. Meanwhile, the group has no plans to expand overseas as the group remains focus on jobs in the local market. We note that the group has completed the proposed 1-for-2 share split, 1-for-4 bonus issue together with 1-for- 4 free warrants at end-2017.

Valuation And Recommendation

With the earnings coming within our expectations, we leave our earnings forecast unchanged. We also maintain our HOLD recommendation with a higher target price at RM1.30 (from RM1.25) after we rolled over our valuation metrics to FY19 by ascribing an unchanged target PER of 17.0x to its FY19 EPS of 7.6 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 RM600.0 mln for FY18. 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 companies in Malaysia and its ability to secure future contracts.

Source: Mplus Research - 27 Feb 2018