Results Highlights

• Econpile’s 1QFY20 net profit sank 41.2% Y.o.Y to RM8.8 mln, dragged down by lower contribution from two major property development projects that are nearing completion stage, coupled with higher percentage of billings from infrastructure projects that yield lower margins. Revenue for the quarter slipped 32.4% Y.o.Y to RM135.4 mln, dragged down by lower execution of work orders.

• The reported earnings came below our expectation, amounting to 15.3% of our previous estimated net profit of RM57.7 mln for the year. The variance in its earnings was mainly due to margins compression from the higher execution of infrastructure projects. The reported revenue also came below our expectations, amounting to 20.8% of our earlier full-year forecast of RM658.0 mln.

• In 1QFY20, piling and foundation works for property projects continue to dominate the group’s revenue, amounting to 70.0% or RM95.2 mln of total revenue, with the remainder RM40.2 mln (30.0%) 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 RM0.4 mln in 1QFY20 vs. RM0.5 mln recorded in 1QFY19.

• In 1QFY20, Econpile continues to maintain a healthy balance sheet with a low net gearing at 0.2x. No dividend was declared as the group historically declares dividend in the final quarter of the financial year end.

Prospects

After an unusually quiet quarter (4QFY19), Econpile has secured two major construction contracts YTD, amounting to RM64.8 mln that made up to 10.8% of our orderbook replenishment assumption of RM600.0 mln for FY20. (see Appendix 1). We reckon that the aforementioned target is achievable as the piling specialist will ride 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 announced under Budget 2020.

As of 1QFY20, Econpile’s unbilled construction orderbook is approximately RM900.0 mln from 25 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. In the meantime, we have not imputed the adjudication proceedings from the progress claims for the mixed project completed for ASM Development (KL) Sdn Bhd amounting to RM67.8 mln.

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.

As the reported earnings came below our forecast, we trimmed our earnings estimates by 17.9% and 17.5% to RM41.6 mln and RM43.4 mln for FY20 and FY21 respectively as we expect margins to remain pressured amid the higher percentage of works completion for infrastructure projects, coupled with the depleting orderbook.

Valuation And Recommendation

We downgrade our recommendation on Econpile to SELL (from Hold) with a lower target price of RM0.47 (from RM0.70). Our target price is derived by ascribing an unchanged target PER of 15.0x to its revised FY20 EPS of 3.1 sen. We reckon that its current share price that has rallied 105.2% YTD, has surpassed its fundamental value.

Nevertheless, we continue to favour Econpile as a niche construction company, specialising in piling and foundation works, backed by its unbilled orderbook of approximately RM900.0 mln that will sustain its earnings over the next two years. A potential re-rating are in the cards, should Econpile’s orderbook replenishment exceed our assumption at RM600.0 mln for both FY20 and FY21.

Risks to our recommendation and target price include stronger-than-expected orderbook replenishment rate of RM600.0 mln for FY20 and FY21. The lower raw material prices and labour cost would potentially boost margins. Any quicker-thanexpected in project completion could also improve Econpile’s efficiency to deploy existing machineries for future orders.

Source: Mplus Research - 28 Nov 2019