Investment Highlights

• We trim our FY19-20F net profit forecasts by 2% each, after updating Econpile’s cash balance. Similarly, we lower our FV to RM0.53 (from RM0.54) based on 9x revised FD CY19F EPS of 5.9 sen, in line with our benchmark forward P/E of 7-10x for small-cap construction stocks. We downgrade our call to UNDERWEIGHT from HOLD as valuations are unattractive at 14-15x forward earnings on muted earnings growth prospects.

• Econpile’s FY18 results came in within our forecast and consensus estimates. FY18 topline expanded 25% YoY but EBIT only grew 3% as EBIT margin eased by 3.4ppts. The lower margins were due to: (1) higher steel cost; and (2) increased infrastructure piling jobs, i.e. 25% of turnover vs. only 9% a year ago (while high-rise property piling jobs made up 75% of turnover, vs. 91% 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.

• So far in FY19, Econpile has secured new jobs worth a total of RM186.2mil, boosting its outstanding construction order book to RM1.1bil (Exhibit 2). Our forecasts assume job wins of RM500mil annually in FY19-21F. Econpile secured RM488.3mil new contracts in FY18.

• We remain cautious on the outlook for the local construction sector. As the government scales back on public projects, local contractors will be competing for a shrinking pool of new jobs in the market. Severe undercutting among the players will result in razor-thin margins for the successful bidders. On the other hand, the introduction of a more transparent public procurement system under the new administration should weed out rent-seekers, paving the way toward healthier competition within the local construction sector.

• We believe Econpile is mitigated by its substantial order backlog that should keep it busy over the next 1-2 years, coupled with its proven ability to compete under an open bidding system.

Source: AmInvest Research - 30 Aug 2018