Results Highlights

• Econpile’s 3QFY18 net profit added 7.3% Y.o.Y to RM23.7 mln on the back of higher recognition from its increased orderbook, coupled with lower effective tax rate of 15.8% vs. 30.9% recorded in the previous corresponding quarter. Revenue for the quarter gained 26.4% Y.o.Y to RM205.0 mln.

• For 9MFY18, cumulative net profit improved 12.9% Y.o.Y to RM67.6 mln. Revenue for the period rose 26.4% Y.o.Y to RM536.1 mln. Nevertheless, the reported earnings fell short of our expectations, amounting to only 70.1% of our previous FY18 estimate of RM96.5 mln. The reported revenue, however, came within our expectations, amounting to 74.5% of our full-year forecast of RM719.6 mln. The variance in its bottomline was mainly due to higher recognition of infrastructure projects that yields lower margins.

• Correspondingly, Econpile’s 3QFY18 gross profit slipped 10.3% Y.o.Y to RM33.5 mln on higher recognition from piling and foundation works for infrastructure projects. Despite that, piling and foundation works from property projects continues to anchor the group’s revenue, amounting to 71.1% (down from 74.9% in 2QFY18) or RM145.7 mln of the group’s total revenue in 3QFY18. Going forward, we expect margins to stabilise as recent contract wins were skewed towards piling and foundation work for building projects.

• As of 9MFY18, Econpile continues to maintain a healthy balance sheet with negligible borrowings. A second interim dividend of 1.0 sen, payable on 26th June 2018, was declared.

Prospects

Econpile has secured some RM467.8 mln worth of projects in 9MFY18, of which RM145.0 mln was secured in 3QFY18. Consequently, the group’s orderbook replenishment makes up 78.0% of our orderbook replenishment target of RM600.0 mln for FY18 (see Appendix 1). However, we expect the replenishment rate to fall short of our expectations due to potential delays in the awards of certain projects amid the uncertainties surrounding the new government’s policy on mega infrastructure projects.

Backed by an unbilled construction orderbook of approximately RM1.10 bln from 16 ongoing projects, (see Appendix 2), we expect earnings to sustain over the coming quarters. Econpile’s orderbook-to-cover ratio at 1.9x against FY17 revenue of RM581.9 mln will continue to provide earnings visibility over the next 2-3 years.

Having prior experience in undertaking the KVMRT Line 1 project, we think that the KVMRT Line 2 project, alongside with LRT3 project, will register margins improvement in coming quarters. However, given the uncertainties surrounding the general construction sector, we have trimmed our orderbook replenishment target to RM400.0 mln (from RM600.0 mln) for FY19 to account for the possibility of delays in the award of infrastructure projects, coupled with the potential downsizing of construction work projects.

Moving forward, we anticipate that Budget 2019 – scheduled to the tabled in October 2018, to provide a clearer picture on Malaysia’s new government policies for the general construction industry. At this juncture, we see delays in the implementation of the planned mega rail projects that may also lead to downsizing or even, all of which are detrimental to the construction industry. Nevertheless, we continue to like Econpile as a niche construction player, specialising on piling and foundation works which are required in all construction project, thereby providing a natural captive market for its services.

Valuation And Recommendation

As the reported earnings came below our expectations, we trimmed our net profit forecast by 5.5% and 9.6% to RM91.2 mln and RM92.1 mln for FY18 and FY19 respectively to reflect the lower margins from piling and foundation works for infrastructure projects, coupled with slower orderbook replenishment rate for FY18 and FY19 at RM500.0 mln and RM400.0 mln respectively (from RM600.0 mln each). However, given that its share price has fallen 45.0% YTD, we think that its valuations are attractive at the current level as the group is trading at prospective PERs of 9.7x and 9.6x for 2018 and 2019 respectively.

Consequently, we upgrade our recommendation on Econpile to a BUY (from HOLD), but with a lower target price at RM0.90 (from RM1.15) by ascribing a lower target PER of 13.0x (from 15.0x) to its revised FY19 EPS of 6.8 sen. The lower target PER is to reflect the general weakness in the construction industry, which is also 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 RM400.0 mln for FY19. 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 - 24 May 2018