Econpile Holdings Bhd (Econpile), which is en-route for a listing on 30 June, is one of the leading piling contractor in Malaysia. Econpile’s current order book now stands at RM450m (1.2x of revenue) and we understand it has tendered for RM2.0b worth of projects. Being one of the pioneers in piling industry, we believe it will likely secure at least 15% of its tender book thanks also to the booming construction sector. All in, we like the company as it (i) is one of the leading players in piling industry (ii) it is one of the few construction companies that has dividend policy of minimum 20% payout of net profit, (iii) has a clean balance sheet i.e. net cash position which enable the group to gear up for future growth, (iv) will be able to ride on current booming construction activities (both residential and non-residential). We derive a fair value (FV) of 63 sen on the stock. We value the stock based on 10x PER on FY15EPS i.e. in line with small-cap peers average PER of 8x-10x. This will give total return (including dividend yield) of 20% to investors. SUBSCRIBE.

One of leading piling contractor. Based on total piling and foundation services market revenue in Malaysia, as at FY13, Econpile has 13% market share in the industry. Hence, this has made the group as one of the major players in the piling and foundation services in Malaysia. By gaining such market share, we believe it has boosted Econpile’s profile and hence, higher chance to secure more jobs in the foreseeable future.

Riding on booming construction sector activities. Recall, our construction sector has been registering double-digit GDP growth since 2012 thanks to the implementation of mega infrastructure (i.e. LRT, MRT, highways) and property projects. Going forward, our in-house economics team is expecting the growth momentum to continue driven by remnant mega projects under 10MP and ETP namely new highways, high-rise towers, MRT2, LRT3, O&G’s RAPID Pengerang, regional corridors, and new property launches. As part of the important piece in the construction sector, we believe the piling and foundation services industry to remain healthy thanks to the booming construction sector. Econpile order book is now at RM450m (1.2x of revenue) and we understand it has tendered for RM2.0b worth of projects.

Strong balance sheet. As at 3QFY14, Econpile has very low net gearing of 0.05x. We expect Econpile to turn into net cash position after the IPO as the group will use 25% of its RM48.6m IPO proceeds to fund for repayment of borrowings. This will provide more room for the group to gear up to invest in quality assets or/and brand new machineries and equipments for future profit growth in a foreseeable future.

Dividend policy of 20%. The management has fixed a dividend policy of 20% payout of net profit for the shareholders. This has translated into about 2-3% dividend yield. Note that Econpile is one of the few contractors that have fixed a dividend policy thanks to its strong balance sheet.

Experience management team. Econpile has been in the industry for more than two decades in Malaysia. The group was founded in 1987 by Mr The Cheng Eng and subsequently Mr Pang Sar was appointed as the group’s ED. Started from a small piling sub-contractor both Mr The and Mr Pang build up the group to where it is now, gaining 13% market share in the industry. Mr The Cheng Eng has about 45 years experience in the construction industry while his partner Mr Pang Sar has about 30 years in the industry.

Forecasting 13-8% net profit growth in FY14-FY15. Driven by existing RM450m orderbook coupled with new contracts assumption of RM300m in FY15, we estimate the group to register 13-8% profit growth in FY14-FY15.

The risks to our fair value include: (i) lower-than-expected orderbook replenishment of RM300m per annum, (ii) higher-than-expected input and other operating costs, (iii) delay in project’s execution.

Source: Kenanga