Summary

• Econpile Holdings Bhd's (Econpile) wholly-owned subsidiary, Econpile (M) Sdn Bhd has received a Letter of Award dated 22nd April 2022 from Domain Resources Sdn Bhd to undertake the substructure works for a proposed phased development comprising Phase 1 Affordable Homes comprising single block of residential units and Phase 2 comprising 3 blocks of residential units at Jalan Pantai Dalam, Kuala Lumpur.

• The contract value is RM37.4m with overall project duration for 15 months from 5th May 2022. We believe that the aforementioned project will be able to command approximately mid-teens EBITDA margins, which is slightly lower than the historical average of piling works for high rise property development projects over the years. This is due to the higher raw material costs as well as operational costs.

• We gather that the aforementioned contract is the third major construction contract secured by Econpile for FY22f. Current orderbook replenishment now stands at RM155.4m, makes up to 77.7% of our expectations of RM200.0m for FY22f. Although the figure is still not within reach with only approximately 2 months left before the end of FY22f, we believe the jobs acceleration will materialise moving into 2H22 in line with the economic recovery.

• Consequently, Econpile's outstanding orderbook of approximately RM650.0m; represents an unbilled orderbook-to-cover ratio at 1.5x against FY21 revenue of RM420.1m. This will provide earnings visibility over the next two years. Meanwhile, tenderbook remains relatively healthy at approximately RM500.0m.

• We believe that the worst could be over for Econpile after enduring a difficult period over the past 2 years that was marred by multiple lockdowns. Recent job wins suggests that contracts flows are beginning to normalise in the construction industry, albeit in a measured manner. Given the historical expertise, we reckon that Econpile is in a prime position to take a slice from the upcoming mega infrastructure project such as the KV MRT3.

• Still, we remain cautious, particularly towards the rising building material costs (close to 50% of Econpile’s cost structure) which will be a massive challenge for the construction industry that is already operating in razor thin margins over the years.

Valuation & Recommendation

• While there is a slim possibility of hitting our orderbook replenishment assumption, we make no changes to our earnings forecast, pending their upcoming 3QFY22 results that is scheduled to be release by end of this month.

• Following the recent weakness in share price, we upgrade our recommendation on Econpile to BUY (from Hold) with an unchanged target price of RM0.32. Our target price is derived by ascribing a target PER of 15.0x to its FY23f 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 - 10 May 2022