Summary

• Econpile Holdings Bhd's (ECONBHD) wholly-owned subsidiary, Econpile (M) Sdn Bhd has received a Letter of Acceptance dated 28th October 2022 from Kota Bharu Medical Centre Sdn Bhd. The contract encompasses the execution and completion of substructure works for a private hospital comprising a 12-storey hospital block and a 11-storey carpark block with other facilities located at Bandar Kota Bharu Jajahan Kota Bharu, Kelantan Darul Naim.

• The contract value is RM24.1m with overall project duration for 12 months, commencing from 12th November 2022. Like the previous contract secured last month, 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.

• Alongside with the aforementioned contract, ECONBHD’s orderbook replenishment year-to-date stands at approximately RM132.2m. This makes up to 52.9% of our expectations of RM250.0m for FY23f as well as 84.9% of FY22 orderbook replenishment of RM155.6m. Although the recent value of contract wins may be small, we believe that the streak of project wins in recent months is a healthy sign for the revival of the group.

• Moving forward, 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 will provide earnings visibility over the next 18 months. Meanwhile, tenderbook remains relatively stable at approximately RM400.0m.

• We believe that ECONBHD will continue to leverage onto their expertise as a piling and substructure specialist to tap into the higher development expenditure allocated under Budget 2023. Still, larger scale infrastructure projects may only be place onto the table post-GE15, sometime towards early 2023.

• Challenges, however, persists within the construction industry which continues to grapple with the shortage of workers. On a brighter note, the scaling down of building material costs in recent months will be a boon for contractors to safeguard their profit margins.

Valuation & Recommendation

• Given that the orderbook replenishment came within expectations, we made no changes to our earnings forecast. Following the extended pullback in share price, we upgrade ECONBHD to HOLD (from Sell) 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 weaker-than-expected orderbook replenishment rate. Higher raw material prices and labour cost would potentially dent margins and vice versa. The pace of execution of projects on hand could also determine ECONBHD’s efficiency to deploy existing machineries for future orders.

Source: Mplus Research - 1 Nov 2022