Results Highlights

• Econpile’s 4QFY19 net profit grew 19.0% Y.o.Y to RM23.2 mln as the previous corresponding quarter’s earnings were affected by project delays and idling cost over-runs incurred in certain infrastructure projects. Revenue for the quarter, however, fell 8.2% Y.o.Y to RM176.6 mln, dragged down by its depleting orderbook.

• For FY19, cumulative net profit sank 70.7% Y.o.Y to RM25.5 mln. Revenue for the year decreased 8.9% Y.o.Y to RM663.3 mln. The reported earnings came slightly above our expectation, amounting to 104.3% of our estimate of RM22.2 mln for the year. The variance in its earnings is mainly due to the lower effective tax rate of 22.2% vs. our assumption of 24.8%. The reported revenue also came slightly above our expectations, amounting to 103.5% of our full-year forecast of RM640.7 mln.

• In FY19, piling and foundation works for property projects continue to dominate the group’s revenue, amounting to 74.6% or RM495.0 mln of total revenue, with the remainder RM168.3 mln (25.4%) derived from piling and foundation works for infrastructure projects. In the meantime, other income comprising of rental income of equipment and gain from disposal of machineries stood at RM4.8 mln in FY19 vs. RM8.5 mln recorded in FY18.

• In FY19, Econpile continues to maintain a healthy balance sheet with a low net gearing of 0.1x. A first and final dividend of 0.5 sen per share for the quarter was declared.

Prospects

It was an unusually quiet quarter (4QFY19) for Econpile as it did not secured any major construction contracts. Nevertheless, FY19 contracts amounting to RM643.0 mln already made up to 98.9% of our orderbook replenishment assumption of RM650.0 mln for FY19. (see Appendix 1). Moving into FY20, we expect Econpile’s orderbook replenishment at RM600.0 mln – riding on the revival of East Coast Rail Link (ECRL) project, Bandar Malaysia mixed development and the resumption of “Belt and Road” train project with China.

As of FY19, Econpile’s unbilled construction orderbook is approximately RM950.0 mln from its 27 on-going projects at various stage of construction (see Appendix 2). The group’s orderbook-to-cover ratio at 1.4x against FY19 revenue of RM663.3 mln will provide earnings visibility over the next two years. For FY20, we expect earnings to see a sharp upturn, boosted by the one-off RM67.8 mln adjudication proceedings from the progress claims for the mixed project completed for ASM Development (KL) Sdn Bhd.

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. In the meantime, Econpile is also seeking for opportunities to expand its current business into Southeast Asia countries.

Valuation And Recommendation

Despite the reported earnings coming slightly above our forecast, we made no changes to our earnings estimates as we expect margins to be slightly pressured moving into FY20 and FY21. Hence, we maintain our HOLD recommendation on Econpile with an unchanged target price of RM0.79.

Our target price is derived by ascribing an unchanged target PER of 13.0x to its normalised FY20 EPS of 6.1 sen (stripping off RM67.8 mln adjudication proceeds from ASM Development (KL) Sdn Bhd for the piling and foundation works for the mixed development). We reckon that its current share price that has rallied 98.4% YTD, is close to its fundamental value. Nevertheless, we continue to like Econpile as a niche construction company, specialising in piling and foundation works, backed by its solid unbilled orderbook of approximately RM950.0 mln 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 and FY21. 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 - 29 Aug 2019