Results Highlights

• Econpile’s 2QFY20 net profit stood at RM8.7 mln vs. a net loss of RM34.4 mln as bottomline normalise from the losses incurred from the projects costs rationalisation, cost overrun and impairment in trade impairments in 2QFY19. Revenue for the quarter, however, fell 7.1% Y.o.Y to RM137.7 mln on the execution of lower orderbook.

• For 1HFY20, cumulative net profit stood at RM17.5 mln vs. a net loss of RM19.4 mln recorded in the previous corresponding period. Revenue for the period declined 21.6% Y.o.Y to RM273.1 mln. The reported earnings came below our expectation, amounting to 41.3% of our estimated net profit of RM42.4 mln for the year. The reported revenue, however, came within our expectations, amounting to 47.9% of our full-year forecast of RM569.7 mln. The variance in the bottomline is mainly due to higher effective tax rate at 27.4% vis-a-vis our assumption of 24.0%.

• In 1HFY20, piling and foundation works for property projects remain as the largest contributor to the group’s revenue, representing 70.0% or RM191.2 mln of total revenue, with the remainder RM81.9 mln (30.0%) derived from piling and foundation works for infrastructure projects.

• In 2QFY20, Econpile continues to maintain a healthy balance sheet with a low net gearing of 0.1x (down from 0.2x recorded in 1QFY20). No dividend was declared as the group traditionally declares dividend at the final quarter of the financial year end.

Prospects

Econpile has secured four major construction contracts year-to-date. Consequently, Econpile’s orderbook replenishment stands at RM156.9 mln makes up to 52.3% of our orderbook replenishment assumption of RM300.0 mln for FY20 (see Appendix 1). As we move forward, we expect the aforementioned figure to see a mild hiccup as progress for several mega infrastructure projects announced under Budget 2020 are still in preliminary stage. Hence, we trimmed our orderbook assumption replenishment to RM300.0 mln (from RM500.0 mln) for FY20 before jobs expect to pick-up in FY21 at RM500.0 mln.

As of 1HFY20, Econpile’s is well equipped with unbilled construction orderbook of approximately RM810.0 mln from several on-going projects at various stage of construction (see Appendix 2). The group’s orderbook-to-cover ratio at 1.2x against FY19 revenue of RM663.3 mln will provide earnings visibility over the next two years.

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

Although the reported earnings came below our expectations, we made no changes to our earnings forecast as we expect earnings recovery to pick up in 2HFY20. Hence, we retain our HOLD recommendation on Econpile with an unchanged target price of RM0.70. Our target price is derived by ascribing an unchanged target PER of 20.0x to its FY21 EPS of 3.5 sen.

We continue to favour Econpile as a niche construction company, specialising in piling and foundation works, backed by its unbilled orderbook of approximately RM810.0 mln that will sustain its earnings over the next two years. A potential re-rating are in the cards, should Econpile’s orderbook replenishment (mainly from the revival of megainfrastructure projects) exceed our assumption at RM300.0 mln and RM500.0 mln for FY20 and FY21 respectively.

Risks to our recommendation and target price include stronger-than-expected orderbook replenishment rate of RM300.0 mln and RM500.0 mln for FY20 and FY21 respectively. Lower raw material prices and labour cost would potentially boost margins. Quicker-than-expected in project completion could also improve Econpile’s efficiency to deploy existing machineries for future orders.

Source: Mplus Research - 26 Feb 2020