Summary

• Econpile Holdings Bhd's (ECONBHD) 3QFY22 remained in the red with net loss at RM16.2m vs. a net profit of RM2.6m recorded in the previous corresponding quarter, dragged down by margins compression from the higher material prices and labour shortages issue. Revenue for the quarter slipped 29.0% YoY to RM92.0m.

• For 9MFY22, cumulative net loss stood at RM27.4m; below our previous net profit projection at RM2.3m and consensus target of RM1.9m. Meanwhile, the reported revenue was at 63.1% and 67.8% of our and consensus forecast of RM435.5m and RM405.4m respectively. The variance is mainly due to the weaker margins that sank ECONBHD’s performance into the red.

• Given the persistently high building material prices, there is little possibility of turnaround in the final quarter. Nevertheless, cash balances at RM53.5m and net gearing at 0.2x suggest that there is still some room for external financing to fund working capital purpose in bid to overcome the tough operating landscape.

• Year-to-date, orderbook replenishment stands at RM155.4m, making up to 77.7% of our expectations of RM200.0m for FY22f. While we think that it is unlikely to hit our target (given that we are only about a month away from the financial year close), jobs acceleration may materialise in subsequent months with the economic activities gaining traction. At the same time, tenderbook stands at RM500.0m, mainly in relation to piling and foundation for property development works.

• As of end 3QFY22, Econpile is equipped with an unbilled construction orderbook of approximately RM550.0m; representing an unbilled orderbook-to-cover ratio at 1.3x against FY21 revenue of RM420.1m. This will provide earnings visibility over the next two years.

• Following the multiple lockdowns over the past 2 years that hampered work progress, we reckon that the construction industry will be in a slightly better position in 2022 as the country transitioned into the endemic phase. Still, we remain cautious on the rising costs of labour and raw materials that could detriment the already razor thin margins within the construction sector.

Valuation & Recommendation

• We slashed our earnings forecast for FY22f to net loss at RM29.1m (from net profit of RM2.3m), while FY23f figures are also revised lower by 54.2% to RM14.1m to account for the persistently high building material and rising labour costs.

• Consequently, we downgrade ECONBHD to SELL (from Hold) with a lower target price of RM0.15 Our target price is derived by ascribing a target PER of 15.0x to its revised FY23f EPS of 1.0 sen.

• Risks to our recommendation and target price include the ability to achieve our targeted orderbook replenishment rate. Higher raw material prices and labour cost would potentially dent margins and vice versa. The pace of projects execution could also determine Econpile’s efficiency to deploy existing machineries for future orders.

Source: Mplus Research - 26 May 2022