Summary

• Econpile Holdings Bhd's unit, Econpile (M) Sdn Bhd, has bagged RM104.5m contract reinforced concrete works from WCT Bhd. The contract is for the retail podium under Parcel 2 of the superstructure works for the Pavilion Damansara Heights mixed development at Jalan Damanlela in Kuala Lumpur.

• The overall duration of the sub-contract is about 17 months and works are expected to commence in June 2020. We believe that the aforementioned project will generate mid-teens EBITDA margins in line with historical average. Year-to-date (YTD), Eocnpile’s orderbook replenishment stands at approximately RM312.0m has exceeded our previous assumption of RM300.0m for the year.

• The latest win bumps Econpile's outstanding orderbook stood to RM780.0m, which translates to an orderbook-to-cover ratio of 1.1x against FY19 revenue of RM663.3m and will provide earnings visibility over the next two years.

• We understand that Econpile is pre-qualified to participate in the East Coast Rail Link (ECRL) project. The recent packages dished out following the approval for the Kota Baru–Dungun realignment suggest that the remaining packages will enter into the picture over the foreseeable future.

Valuation & Recommendation

• Although Econpile’s orderbook wins exceeded our initial projection, we made no changes to our earnings forecast for FY20 as we deem that billings from the new win will only kick in from FY21. Nevertheless, we raise our orderbook replenishment assumption to RM400.0m (from RM300.0m) for FY21 as we reckon that construction activities to pick up from the government’s effort to re-vitalise the ailing economy as the country enters into the recovery phase of MCO.

• We raise our earnings forecast for FY21 by 12.0% to RM34.2m to account for the potentially stronger orderbook replenishment prospects. We, however, maintain our SELL recommendation on Econpile with a higher target price RM0.51 (from RM0.46) as current valuations appears to be fairly stretch following the uptick in share price with prospective PERs trading at 77.2x and 24.2x for FY20 and FY21 respectively.
• Our target price is derived by ascribing an unchanged target PER of 20.0x to its revised FY21 EPS of 2.6 sen. A potential re-rating is in the cards, should Econpile’s orderbook replenishment exceed our assumption at RM400.0m for FY21 or margins to come above our assumptions.
• Risks to our recommendation and target price include weaker-than-expected orderbook replenishment rate. Higher raw material prices and labour cost would potentially trim margins. Delay in project completion could also negatively affect Econpile’s efficiency to deploy existing machineries for future orders.

Source: Mplus Research - 9 Jun 2020