Summary

• Econpile Holdings Bhd's (ECONBHD) wholly-owned subsidiary, Econpile (M) Sdn Bhd has received a letter of appointment dated 29th September 2022 from Berjaya Construction Bhd to undertake the substructure works for a proposed 41-storey service suites at Jalan Imbi, Kuala Lumpur.

• The contract value is RM24.6m with overall project duration for 13 months, commencing from 6th October 2022. We believe that the aforementioned project will be able to command high single digit EBITDA margins, which is slightly lower than the historical average of piling works for high rise property development projects over the years. This is premised to the inflationary cost pressure arising from higher raw material and labour costs.

• Together with the aforementioned contract, ECONBHD’s orderbook replenishment year-to-date stands at RM83.5m. This makes up to 33.4% of our expectations of RM250.0m for FY23f. We reckon that future jobs will accelerate moving into subsequent months as property launches over the past 2 years that were held off will take place in this and next year.

• Consequently, ECONBHD's outstanding orderbook stood at approximately RM450.0m; represents an unbilled orderbook-to-cover ratio at 1.2x against FY22 revenue of RM373.4m. This will provide earnings visibility over the next 18 months. Meanwhile, tenderbook remains relatively healthy at approximately RM500.0m.

• Year-to-date job wins already makes up to 53.7% of FY22 amount at RM155.6m. This suggests that contracts flows are beginning to normalise in the construction industry. We also expect the works for property-related projects to dominate over the foreseeable future.

• We reckon that ECONBHD’s position as a niche construction player, specialising in the piling and foundation works will be able to leverage onto the infrastructure development initiatives from the upcoming tabling of Budget 2023. With KVMRT3 project remains on the table, the prospect of the revival of Kuala Lumpur-Singapore high-speed rail (HSR) project also bodes well.

• Challenges, however, persists within the construction industry which continues to battle with the elevated building material costs. Also, the difficulty in recruiting foreign labour will pose a hurdle as only less than 15.0% of the approved 400,000 foreign workers for all economic sectors have entered Malaysia year-to-date.

Valuation & Recommendation

• Given that the orderbook replenishment falls within expectations, we made no changes to our earnings forecast. We maintain our SELL recommendation on ECONBHD with an unchanged target price of RM0.15. Our target price is derived by ascribing a target PER of 15.0x to its FY23f EPS of 1.0 sen.

• Risks to our recommendation and target price include the stronger-than-expected 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 ECONBHD’s efficiency to deploy existing machineries for future orders.

Source: Mplus Research - 5 Oct 2022