Summary

• Econpile Holdings Bhd's (ECONBHD) 3QFY23 net loss narrowed to -RM0.2m vs. a net loss of -RM16.2m recorded in the previous corresponding quarter, driven by better margins generated from its on-going construction projects arising from stabilising building material costs and improvement in labour supply. Revenue for the quarter climbed 5.1% YoY to RM96.7m.

• For 9MFY23, cumulative net loss narrowed to -RM6.7m against a net loss of - RM27.4m recorded in the previous corresponding period. The reported figures came in below our expected net profit of RM3.3m and consensus expectations of RM7.1m. While the final quarter may see the group returning to the black, we reckon that the numbers may not be able to strike out the cumulative losses in 9MFY23.

• In 3QFY23, cash balances improved to RM47.1m, from RM36.9m 2QFY23 and net gearing was at 0.1x. We gather that the net operating cash flow has returned to the black during the quarter.

• As of end-3QFY23, ECONBHD is equipped with an unbilled construction orderbook of approximately RM404.7m from 24 on-going projects; representing an orderbookto-cover ratio of 1.1x against FY22 revenue of RM366.6m. This will sustain their revenue over the next 18 months. Despite YTD orderbook replenishment (c. RM223.0.m) exceeded FY22 replenishment at RM155.6m, we reckon that earnings recovery is still at nascent stage.

• For now, we maintain our view that ECONBHD may return to the black in coming quarters, while the acceleration of mega-infrastructure projects may take place sometime in 2H23. The completion of relatively large scale Cambodia project may cement their reputation for future works.

• We reckon that the elevated building material cost and rising minimum wages to keep margins recovery in check. On a brighter note, acute labour shortage issue has alleviated and this may provide room for breather to execute multiple projects simultaneously.

Valuation & Recommendation

• Following the weaker-than-expected result, we now expect FY23f to register core net loss of -RM4.0m, after taking into account of slower-than-expected recovery in margins, while keeping FY24f numbers unchanged as we reckon that the recovery during that period is largely on the table.

• We maintain our SELL recommendation on ECONBHD with an unchanged target price of RM0.16. 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 - 25 May 2023