Summary

• Econpile Holdings Bhd's (ECONBHD) 2QFY23 net loss narrowed to -RM1.6m vs. a net loss of -RM5.4m recorded in the previous corresponding quarter, mainly attributable to higher contribution from Cambodia project, while building material costs normalised. Revenue for the quarter, however, declined marginally by 1.6% YoY to RM95.3m.

• For 6MFY23, cumulative net loss narrowed to -RM6.5m against a net loss of - RM11.2m recorded in the previous corresponding period. The reported figures came in below our expected net profit of RM14.3m.

• In 2QFY23, cash balances stood at RM36.9m and net gearing at 0.2x implies that there are room to tap into external financing to fund working capital in bid to overcome the tough operating landscape.

• We gather that ECONBHD has secured some RM166.5m worth of contracts year-todate. This makes up to 66.6% of our orderbook replenishment target of RM250.0m for FY23f. We expect construction activities to accelerate in 2H23, particularly for mega infrastructure projects post re-tabling of Budget 2023.

• As of end-2QFY23, ECONBHD is equipped with an unbilled construction orderbook of approximately RM433.9m; representing an orderbook-to-cover ratio of 1.2x against FY22 revenue of RM373.4m. This will sustain their revenue over the next 18 months.

• Moving forward, the normalising of steel prices in recent months should bode well for the general construction industry. Still, the elevated concrete price that rose 2.6% MoM in January 2023 will keep margins recovery in check. Hence, we expect ECONBHD may return to the black only towards end-2023.

• With signs of improvement over the acute labour shortage issue, we reckon that projects execution may garner pace. While the local construction industry is expected to stay muted over the foreseeable future, we believe jobs acceleration may take place towards end-2023.

Valuation & Recommendation

• Given the weaker-than-expected result, we slashed our FY23f core net profit lower by 76.6% to RM3.3m, taking into account of the sluggish operating landscape, while keeping FY24f numbers unchanged as we reckon that the recovery during that period is largely on the table.

• Following the recent appreciation in share price, we downgrade ECONBHD to SELL, but with a higher target price of RM0.16 as we rolled over our valuation metrics to FY24f. Our target price is derived by ascribing a target PER of 15.0x to its FY24f EPS of 1.1 sen.

• Risks to our recommendation and target price include the stronger-than-expected orderbook replenishment rate. Lower raw material prices and energy cost would potentially improve 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 - 24 Feb 2023