• 1QFY19 earnings slumped -29.0% yoy and -22.7% qoq to RM15m and trailed our estimates at 20.2%. This was due to higher labour intensive work activities for certain projects.

• Noteworthy, it has not declare any interim dividend, taking a prudent stance to conserve cash for working capital needs while keeping its net gearing low at 0.16x.

• We reduce our FY19F forecast by -21% and FY20F by -30% as we expect margins to come under pressure on the back of the poor outlook for the broader sector.

• Downgrade to SELL (from HOLD) with a lower TP of 0.50 (from RM0.80) after pegging a lower PE multiple of 10.7x (from 14x) to its FY19F EPS, similar to the sector average.

Earnings below our estimate

Econpile’s 1QFY19 earnings slumped -29.0% yoy and -22.7% qoq to RM15m due to lower margin on higher labour-intensive work activities for certain projects. Interestingly, revenue was ahead of our estimates at 29.7%.

Cash conservation

The company has taken a prudent stance by not declaring any interim dividend to conserve cash for its working capital needs and to contain its net gearing at 0.16x. This is on the backdrop of growing receivables in its balance sheet and tough prospects. Hence, we pare down our dividend expectation at 1.0 sen per annum until FY21F.

Changed earnings forecast on margin

We cut our earnings forecast for FY19F by -20.5% and FY20F by -30.1% to reflect lower margins for on-going project possibly on prolonged labour-intensive works activities on these projects.

Downgrade to SELL with lower TP of RM0.50

We downgrade our call to SELL with a lower TP of RM0.50 (from RM0.80) as we pegged a lower PE multiple of 10.7x (from 14.0x) to our FY19 EPS, similar KL Construction Index. While its existing orderbook remains solid at RM1.1bn, we are concern on its margin erosion given high labour requirements for on-going projects. The sector also remains uninspiring which would lead to intense competition given the limited job supply from both public and private segments.

Source: BIMB Securities Research - 27 Nov 2018