We opine that the 54% meltdown in share prices since GE14 has grossly priced in the headwinds currently faced by the construction sector, in wake of a major cutback in infrastructure spending and the reduction in overall margins as the government observes higher standards of transparency and accountability in public procurement. Nevertheless, we remain positive on ECONBHD due to: (1) high barrier of entry given the considerable costs of equipment and machinery, as well as the limited availability of experienced operators (2) lower payment risk compared to industry, (3) potential revival of certain mega projects, albeit on a smaller scale (4) sturdy balance sheet (0.04x net gearing end Dec) provides the Group greater flexibility for project execution/expansion and sustainable dividend payment, and (5) attractive risk-reward profile at 9.8x FY20E P/E (30% lower compared to its peers), with strong outstanding order book of ~RM1bn to provide earnings visibility over the next two years and a decent 3.1% yield.

One-stop foundation specialist. ECONBHD is a full range of piling (bored piling, driven piles and jack-in piles) and foundation specialist in Malaysia providing piling solutions and foundation works, which includes earth retaining systems, earthworks, substructure and basement construction works. To date, the group has completed more than RM2.5bn worth of piling and foundation services encompassing numerous infrastructure and property development projects in the Klang Valley, Penang, Johor, Pahang, Sabah and Sarawak. Among of the notable projects that ECONBHD has involved include Package N3 of Ipoh - Padang Besar Electrified Double Tracking project, Tanjong Agas Oil & Maritime Industrial Park, the 30-storeys Menara Hap Seng 2, Klang Valley MRT and LRT as well as deep basement works for Elite Pavilion and MAS Building in downtown KL.

Piling and foundation is a safe bet. As piling and foundation works are usually in the early stage of construction works, payment and cash flow risks are substantially reduced, supported by its reputable clientele. Besides, the segment, which constitutes 10-15% of the total construction value, provides better profit margins from civil works.

Potential revival of government projects. Despite the headwinds currently faced by the construction sector, there are near-to-medium-term catalysts in sight, indicating better prospects on order book replenishment. We believe this could be due to a low likelihood of further bad news in the sector, with most project reviews have taken place. Pipeline of job opportunities that could emerge in the future include the Klang Valley Double Track (RM3bn), ECRL (RM35-40bn), KL-SG HSR (RM25bn), and Klang Valley MRT 3 (RM20bn). Besides these mega projects, government contract awards are expected to pick up in 2H19 as tenders are being called in 1H19, which is likely to comprise of government hospitals, schools, roads, railway and water supply/ distribution.

Poised for a downtrend line breakout after a brief consolidation. In the short term, ECONBHD may trap in consolidation mode as share prices continue to hover below the multiple major SMAs and flattish daily indicators. However, a successful breakout above the downtrend line near RM0.50 will lift prices higher towards RM0.57 (25 Feb high) and our LT objective at RM0.60 (38.2% FR). On the contrary, near term supports are RM0.44 (18 Mar) and RM0.42 (daily Lower BB). Cut loss at RM0.41

Source: Hong Leong Investment Bank Research - 27 Mar 2019