Investment Highlights

• We maintain our forecasts and HOLD call, but reduce our FV by 30% to RM0.60 (from RM0.86) based on 9x CY19F EPS of 6.7sen, to reflect a lower benchmark forward target PE of 7-9x for small-cap construction stocks. We previously regarded Econpile as a mid-cap construction stock and valued it at 14x forward earnings.

• Econpile’s 9MFY18 results came in within our expectations at 78% of our full-year forecast but missed market expectations at only 70% of full-year consensus estimates.

• 9MFY18 topline expanded 26% YoY but EBIT only grew 6% as EBIT margin eased by 3.2ppts. The lower margins were due to: (1) higher steel cost, and (2) increased infrastructure piling jobs, i.e. 24% of turnover vs. only 8% a year ago (while high-rise property piling jobs made up 76% of turnover, vs. 92% a year ago).

• Typically, infrastructure piling jobs (for instance, LRT or MRT lines) command lower margins due to the high idle times for machines as they have to be mobilised to a new spot along the line every few days or weeks, while highrise property piling jobs stay on the same site throughout the project period.

• During a recent analyst briefing, Econpile reiterated its guidance for new job wins normalising to RM600mil in FY18F (vs. actual job wins of RM1.19bil and RM662mil in FY17 and FY16 respectively). This is consistent with our assumption of RM600mil annually in FY18-20F. Thus far in FY18, Econpile has secured new jobs worth a total of RM467.8mil. It is eyeing, among others, the remaining piling packages for Pavilion Damansara Heights (Phase 2) worth about RM200mil. Its outstanding order book currently stands at RM1.1bil (Exhibit 2).

• Econpile is not spared the weakened prospects of the construction sector, as the government puts under review various mega infrastructure projects on grounds of fiscal prudence. These projects could potentially be deferred, scaled down or even cancelled. Also, the introduction of a more transparent public procurement system to plug leakages will translate to lower margins for players. However, we take comfort in Econpile’s substantial order backlog that should keep it busy over the next two years.

Source: AmInvest Research - 24 May 2018