Results Highlights

• Econpile’s 2QFY19 net loss stood at RM34.4 mln vs. a net profit of RM22.7 mln recorded in the previous corresponding quarter, impacted by: (i) RM18.5 mln loss due to project cost rationalisation and changes in the design/scope of work in two infrastructure projects, (ii) RM15.4 mln cost overrun for piling and foundation works for a property project, and (iii) RM15.1 mln impairment in trade receivables against a particular debtor. Revenue for the quarter slipped 8.6% Y.o.Y to RM148.2 mln, dragged down by its depleting unbilled orderbook.

• For 1HFY19, cumulative net loss stood at RM19.4 mln vs. a net profit of RM43.9 mln recorded in the previous corresponding period. Revenue for the period, however, rose 5.3% Y.o.Y to RM348.5 mln. The reported earnings came below our previous expectation of RM60.5 mln for the year. The reported revenue, however, came within our expectations, amounting to 49.4% of our full-year forecast of RM705.2 mln. The variance in the bottom line is mainly due to the variation orders, cost overrun and impairment of its trade receivables.

• In 1HFY19, piling and foundation works for property projects continue to dominate the group’s revenue, amounting to 74.0% or RM257.9 mln (down from 78.9% recorded in the previous corresponding period) of the group’s total revenue, with the remaining RM90.6 mln (26.0%) derived from piling and foundation works for infrastructure projects. In 2QFY19, Econpile continues to maintain a healthy balance sheet with a low net gearing of 0.04x.

Prospects

It was an unusually quiet period for Econpile after failing to secure any major piling and foundation contract in 2QFY19. Excluding the recently secured basement and substructure works for Pavillion Damansara 2 valued at RM209.3 mln, its 1HFY19 contract wins amount to RM253.6 mln, filling 46.1% of our orderbook replenishment assumption of RM550.0 mln for FY19. (see Appendix 1)

As of 1HFY19, Econpile is backed by an unbilled construction orderbook of approximately RM1.00 bln from ongoing construction projects (see Appendix 2). The group’s orderbook-to-cover ratio at 1.4x against FY18 revenue of RM728.4 mln will provide earnings visibility over the next two years. Despite that, we see expect earnings growth to slow-down due to: (i) margins compression arising from higher labour cost, (ii) cost revision of government infrastructure projects (KVMRT2 and LRT3) leading to variation of orders in its existing orderbook, and (ii) slowdown in the general construction industry that could see fewer or smaller value of contracts being dished out.

Moving forward, Econpile will continue to tender for property-related projects in the Klang Valley which is in tandem with the group’s core expertise in delivering piling works and substructure works for high-rise buildings within the urban environment. We also expect earnings to stage a recovery in the coming quarters in absence of the oneoff impairment loss on its trade receivables.

Valuation And Recommendation

With the reported earnings falling short of our forecast, we slashed our net profit forecast by 86.5% and 19.2% to RM8.8 mln and RM49.3 mln for FY19 and FY20 respectively to account for the losses from the variation of work orders, impairment of trade receivables and the one-of cost overrun in the piling and foundation of a property development project in FY19.

We maintain our HOLD recommendation on Econpile, but with a lower target price of RM0.48 (from RM0.65) as we rolled over our valuation metrics to FY20 by ascribing a target PER of 13.0x to its revised FY20 EPS of 3.7 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 RM1.00 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 RM550 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 - 26 Feb 2019