We maintain our HOLD call, keep our forecasts relatively unchanged, but raise our FV by 3% to RM2.22 (from RM2.16) as we roll forward our valuation base year to CY18 from FY18. Our FV is now based on 13x CY18F EPS of 17.1sen, at a slight premium to our 1-year forward target PE of 10-12x for small-cap construction stocks, to reflect a relatively less competitive piling segment vis-à- vis general contracting.
Econpile’s FY17 results beat our forecast by 8% but met consensus estimates. The variance against our forecast came largely from slightly stronger-than-expected billings.
FY17 net profit grew 20% YoY as the top line expanded 26% YoY on relatively stable margins.
Econpile ended FY17 with job wins worth a total of RM1.19bil (in line with our assumption of RM1.2bil), underpinned largely by the RM570.4mil foundation and basement structure works for Pavilion Damansara Heights – the biggest contract it has secured ever.
During a recent analyst briefing, Econpile guided for job wins normalising to RM600-700mil annually from FY18F onwards (which is consistent with our assumption of RM600mil annually in FY18-20F). Recall, Econpile secured RM627mil new jobs in FY16.
Econpile is confident of sustaining its overall margins (>20% at the gross level). This will be achieved: (1) via the provision of alternative design (that will result in cost savings) to the Pavilion Damansara Heights project; (2) by virtue of it now having a lower number of projects to manage at any one point, as it moves towards larger projects (it now has about 18 ongoing projects, vs. 25-26 previously); and (3) a more stable input cost with steel bar prices having stabilised (steel makes up about 20- 30% of total input cost), while cement prices remain depressed.
We like Econpile for its strong earnings visibility backed by the bright prospects of the piling/foundation segment coupled with its sizeable order backlog of RM1.2bil (Exhibit 2) which will keep it busy for the next 12-24 months. The entry barrier to the sector is high given the high costs of equipment and machinery, as well as the limited availability of experienced operators.
However, at the current price, we believe the market has very much priced in Econpile’s fundamentals.
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