Results Highlights

• Econpile’s 4QFY18 net profit fell 6.7% Y.o.Y to RM19.5 mln, dragged down by higher contribution from piling and foundation works for infrastructure projects that yields lower margins. Revenue for the quarter, however, climbed 21.9% Y.o.Y to RM192.3 mln.

• For FY18, cumulative net profit added 7.8 Y.o.Y to RM87.1 mln. Revenue for the year expanded 25.2% Y.o.Y to RM728.4 mln. The reported earnings came slightly below our expectations, amounting to 95.6% of our FY18 estimate of RM91.1 mln. The reported revenue, however, came within our expectations, amounting to 103.8% of our full-year forecast of RM702.0 mln.

• Econpile’s 4QFY18 gross profit slipped 5.3% Y.o.Y to RM30.9 mln on higher recognition from piling and foundation works for infrastructure projects. Despite that, piling and foundation works from property projects continue to anchor the group’s revenue, amounting to 73.6% or RM141.6 mln of the group’s total revenue in 4QFY18.

• Going forward, we expect margins to stabilise as recent contract wins were skewed towards piling and foundation work for building projects. We expect EBITDA margins to come in between 20.0%-22.0% over the next two years. In FY18, Econpile continues to maintain a healthy balance sheet with net gearing of 0.1x.

Prospects

Econpile has secured a major contract valued at RM20.5 mln in 4QFY18, bringing its orderbook replenishment to RM473.0 mln in FY18. This makes up to 94.6% of our orderbook replenishment estimate of RM500.0 mln in FY18 (see Appendix 1). Following a period of government transition which had a negative impact on the construction industry, we think that new orders will starts to pick up moving into 2019, of which we have imputed an orderbook replenishment rate of RM600.0 mln for FY19.

Backed by an unbilled construction orderbook of approximately RM1.10 bln from more than 10 ongoing projects, (see Appendix 2), we expect earnings to remain firm over the foreseeable future. Econpile’s orderbook-to-cover ratio at 1.5x against FY18 revenue of RM728.4 mln will continue to provide earnings visibility over the upcoming two years.

Moving forward, we expect a reduction in the value of future government-related infrastructure projects work, whilst works from piling and foundation for property development projects will continue to dominate its earnings over the near term. Nevertheless, the tabling of Budget 2019 in early November 2018 will offer further clarity on the government’s focus on the construction industry.

Valuation And Recommendation

With the reported earnings coming slightly below our estimates, we also trimmed our net profit forecast by 1.2% and 0.7% to RM90.6 mln and RM95.6 mln for FY19 and FY20 respectively to reflect the lower margins from piling and foundation works on infrastructure projects.

Consequently, we maintain our HOLD recommendation on Econpile with an unchanged target price of RM0.90 by ascribing a target PER of 13.0x (unchanged) to its FY19 EPS of 6.8 sen. We continue to like Econpile as a niche construction company, specialising in piling and foundation works, backed by its solid unbilled orderbook of RM1.10 bln that will comfortably sustain its earnings over the next two years.

Risks to our recommendation and target price include inability to meet our targeted orderbook replenishment rate of RM600.0 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 - 30 Aug 2018