Summary

• Econpile Holdings Bhd's wholly-owned subsidiary, Econpile (M) Sdn Bhd has received a Letter of Acceptance dated from Tunku Abdul Rahman University College to undertake the earthwork, piling, infrastructure and related works for a 7-storey activity and recreation centre at Jalan Genting Kelang, Mukim Setapak, Bandaraya Kuala Lumpur, Wilayah Persekutuan. The contract value is RM22.7m.

• The overall duration of the contract is 10 months and works are expected to commence in September 2021. We believe that the aforementioned project will generate approximately 10-15% EBITDA margins, which is slightly lower than the historical average for piling works in high rise property development projects over the years. The expected margins erosion is premised to the rising raw material costs and operational cost arising from the compliance to the standard operating procedures amid the on-going Covid-19 pandemic.

• The aforementioned contract marks the first major construction contract secured by Econpile for FY22f. Current orderbook replenishment makes up to 4.5% of our expectations of RM500.0m for the year. We believe that further opportunities are in the cards, particularly from end-2021 which is in line with the revival of construction industry as majority of the population is expected to be vaccinated and construction work orders may operate at wider scale.

• As a result, Econpile's outstanding orderbook of approximately RM700.0m, which translates to an orderbook-to-cover ratio of 1.7x against FY20 revenue of RM403.0m that will provide earnings visibility over the next 18 months.

• Going forward, we expect projects acceleration to remain on course as new launches from property developers. Already, signs of revival were demonstrated by Malaysia’s construction sector that grew 42.6% YoY in 2Q21 to RM28.20bn, bringing value of construction work completed at RM59.60bn (+8.7% YoY).

Valuation & Recommendation

• Given that that orderbook replenishment falls within our expectations, we make no changes to our earnings forecast. Following the recent share price weakness, we upgrade Econpile to BUY (from Hold), with an unchanged target price of RM0.44. Our target price is derived by ascribing a target PER of 15.0x to its FY22f EPS of 2.9 sen.

• Risks to our recommendation and target price include weaker-than-expected orderbook replenishment rate and higher raw material prices and labour cost. Meanwhile, faster-than-expected project execution could also improve Econpile’s efficiency to deploy existing machineries for future orders.

Source: Mplus Research - 20 Aug 2021