Summary

• Econpile Holdings Bhd's wholly-owned subsidiary, Econpile (M) Sdn Bhd’s joint venture partner, China Communication Construction Company (M) Sdn Bhd (CCCC) had on 7 January 2022 issued a notice of termination to Gabungan Strategik Sdn Bhd (GSSB) for breach of the sub-contract for the execution and completion of foundation, substructures and other ancillary works for Package SUKE-CA3 of the Sungai Besi-Ulu Kelang Elevated Expressway (SUKE) project.

• Recall that Econpile through a 40:60 joint venture ratio with CCCC has bagged the contract valued at RM389.1m in December 2016. The overall duration of the contract was 17 months and we gather that Econpile’s scope of works valued at RM158.3m has already been completed. Therefore, we believe that there would be no operational impact towards Econpile and bulk of the contract value has already been recognised in prior years.

• We understand that the retention sum of RM8.0m has yet to be billed as the aforementioned amount is not due yet. With Econpile completed their scope of works within the stipulated timeframe, we are fairly sanguine that the amount will be recognised in the foreseeable future.

• Moving forward, Econpile’s unbilled construction orderbook of approximately RM800.0m; representing an unbilled orderbook-to cover ratio at 1.9x against FY21 revenue of RM420.1m that provide earnings visibility over the next two years. In the meantime, Econpile will focus on playing catchup with backlog orders and continues to tender for both the building and infrastructure-related jobs.

• While there is little excitement for the construction sector under the Budget 2022, we remain cautiously optimistic for the sector recovery in 2022. We reckon that challenges coming from the rising raw material prices, additional operational costs in compliance to the Covid-19 standard operating procedures (SOPs) and the shortage of workers will continue to remain a hurdle to keep margins at pre-Covid- 19 levels.

Valuation & Recommendation

• Given the dispute between CCCC and GSSB has no operational impact on Econpile, we make no changes to our earnings forecast. We maintained our HOLD recommendation on Econpile with an unchanged target price of RM0.32. Our target price is derived by ascribing a target PER of 15.0x to its FY22f EPS of 2.1 sen.
• Risks to our recommendation and target price include weaker-than-expected orderbook replenishment rate and higher raw material prices and labour cost. Meanwhile, slower-than-expected project execution could also deter Econpile’s efficiency to deploy existing machineries for future orders.

Source: Mplus Research - 20 Jan 2022