Results Highlights

• Econpile’s 3QFY19 net profit declined 8.3% Y.o.Y to RM21.7 mln, dragged down by slower execution from deferment of certain infrastructure projects. Revenue for the quarter fell 32.6% Y.o.Y to RM138.3 mln, dragged down by its depleting unbilled orderbook.

• For 9MFY19, cumulative net profit sank 96.5% Y.o.Y to RM2.3 mln. Revenue for the period decreased 9.2% Y.o.Y to RM486.7 mln. The reported earnings came above our previous expectation of RM8.8 mln for the year. The reported revenue, however, came within our expectations, amounting to 69.0% of our full-year forecast of RM705.2 mln. The variance in the top line is mainly due to the slowdown in project execution from certain infrastructure projects, whilst the stronger-than-expected bottomline came following the normalisation of its margins from one-off losses recorded in 2QFY19.

• In 9MFY19, piling and foundation works for property projects continue to dominate the group’s revenue, amounting to 76.2% or RM370.7 mln (up from 75.9% recorded in the previous corresponding period) of the group’s total revenue, with the remainder RM116.0 mln (23.8%) derived from piling and foundation works for infrastructure projects.

• In 3QFY19, Econpile continues to maintain a healthy balance sheet with a low net gearing of 0.1x.

Prospects

Despite a wretched 1HFY19 that saw no contracts wins in 2QFY19, the group is still braced for a recovery moving into the second half of the fiscal year. The rebound will be backed by the resumption of mega infrastructure projects that were put on hold post GE14. Together with three major contracts secured in 3QFY19, Econpile’s contract wins amount to RM638.6 mln in 9MFY19, represent 98.3% of our orderbook replenishment assumption of RM650.0 mln for FY19. (see Appendix 1)

As of 3QFY19, Econpile is backed by an unbilled construction orderbook of approximately RM1.00 bln from its on-going construction projects (see Appendix 2). The group’s orderbook-to-cover ratio at 1.3x against FY18 revenue of RM728.4 mln will provide earnings visibility over the next two years. Moving forward, we expect earnings to rebound from the one-off impairment in certain infrastructure projects that were completed in 1HFY19, coupled with revival of mega infrastructure projects.

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. The group also does not discount the possibility of bidding for projects in the Asian region such as Myanmar, Vietnam, Cambodia, Singapore and Indonesia.

Valuation And Recommendation

With the reported earnings coming above our forecast, we raised our net profit forecast by 153.5% and 11.1% to RM22.3 mln and RM54.3 mln for FY19 and FY20 respectively as we expect earnings to normalise in subsequent quarters from the one-off losses from the variation of work orders, impairment of trade receivables and cost overrun that incurred in 2QFY19.

Despite that, we maintain our SELL recommendation on Econpile, but with a higher target price of RM0.53 (from RM0.48) as we ascribed an unchanged target PER of 13.0x to its FY20 EPS of 4.1 sen as we reckon that its current share price that has rallied 55.8% YTD, is already ahead of its fundamentals. Nevertheless, 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 RM600.0 mln for FY20. 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 segment in Malaysia and its ability to secure future contracts.

Source: Mplus Research - 28 May 2019