Results Highlights

• Econpile’s 1QFY19 net profit fell 29.0% Y.o.Y to RM15.0 mln, dragged down by higher contribution from piling and foundation works for infrastructure projects that yields lower margins. Revenue for the quarter, however, rose 18.6% Y.o.Y to RM192.3 mln.

• The reported earnings came below our expectations, amounting to only 16.6% of our previous FY19 estimate of RM90.6 mln. The reported revenue, however, came within our expectations, amounting to 26.2% of our full-year forecast of RM763.8 mln.

• Econpile’s 1QFY19 gross profit slipped 16.8% Y.o.Y to RM25.7 mln on higher recognition from piling and foundation works for infrastructure projects. Despite that, piling and foundation works from property projects continue to dominate the group’s revenue, amounting to 75.9% or RM152.1 mln (down from 82.8% recorded in the previous corresponding quarter) of the group’s total revenue in 1QFY19 with the remainder, RM48.2 mln (24.1%) derived from piling and foundation works for infrastructure projects.

• Going forward, we expect margins to remain at current levels as piling and foundation works for infrastructure projects would make up to 25.0%-30.0% of the group’s total revenue in both FY19 and FY20. Meanwhile, we expect EBITDA margins to come in between 15.0%-20.0% over the next two years. In 1QFY19, Econpile continues to maintain a healthy balance sheet with net gearing of 0.2x.

Prospects

Econpile has secured three major contracts with a combined value at RM186.2 mln in 1QFY19. In the absence of new mega-infrastructure projects in Budget 2019, we have trimmed our orderbook replenishment rate for FY19 to RM500.0 mln (from RM600.0 mln). Consequently, the recent contracts secured in 1QFY19 makes up to 37.2% of our revised orderbook replenishment estimate of RM500.0 mln for FY19 (see Appendix 1).

Backed by an unbilled construction orderbook of approximately RM1.10 bln from 19 ongoing construction projects, we expect earnings growth to slow over the foreseeable future due to margin compression resulting from higher contribution from piling and foundation works for infrastructure projects as recent contracts wins comprises a mixture of piling and foundation works for both property development and infrastructure projects, compared to previous contract wins that are predominately on building projects. Nevertheless, 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, works from piling and foundation for property development projects to dominate its earnings over the near term. We note that the group is tendering for some RM1.00 bln worth of piling and foundation works for both property development and infrastructure projects, predominantly in the Klang Valley.

Valuation And Recommendation

With the reported earnings falling short of our forecast, we slashed our net profit forecast by 27.7% and 30.6% to RM65.4 mln and RM56.8 mln for FY19 and FY20 respectively to reflect the potential slowdown of orderbook replenishment for FY19, coupled with the higher contribution from piling and foundation works for infrastructure projects that yields lower margins.

We maintain our HOLD recommendation on Econpile, but with a lower target price of RM0.65 (from RM0.90) by ascribing a target PER of 13.0x (unchanged) to its revised FY19 EPS of 4.9 sen. We, however, 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 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 RM500.0 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 - 27 Nov 2018