Investment Highlights

• We maintain our HOLD call, forecasts and FV of RM2.22. Our FV is based on 13x CY18F EPS of 17.1 sen, 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 has proposed a 1-for-1 share split, and post share split, a 1-for-4 bonus and warrant issues.

• The share split will double its share base from 535mil shares to 1,070mil shares, and the bonus issue will boost it further by 25% to 1,337.5mil shares.

• Based on the last traded cum-price of RM3.00, the ex price works out to be RM1.20 (RM3.00 x 2 ÷ 5). Meanwhile, based on our cum-FV of RM2.22, the ex-FV works out to be RM0.89 (RM2.22 x 2 ÷ 5).

• The warrant issue will entail the issuance of 267.5mil 5- year warrants with an indicative exercise price of RM1.19. Based on our calculation, the full conversion of the warrants will dilute FY18F EPS by 9.7%.

• For illustration purposes, an investor with an initial investment of 2,000 shares in Econpile will end up with 5,000 shares and 1,000 warrants, upon completion of the exercise.

• We are neutral on the exercise. We do not believe an apple will become bigger by virtue of it being cut into more pieces. Also, while the warrants will command a market value upon listing, we believe this value will effectively be “carved” out from the market value of the mother shares, a mechanism also known as “dilution”.

• 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 1) 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, we believe the current share price has very much reflected Econpile’s fundamentals.

Source: AmInvest Research - 7 Sept 2017