· Share price jumped 102% since IPO. Recall that we issued an IPO note on Econpile Holdings Bhd (ECONBHD) last year with a “SUBSCRIBE” rating. IPO investors that are still holding on to this stock would have enjoyed a gross return of 106.6% over 12 months (including dividends). The stock price had jumped by 102% and with 2.5 sen dividend paid out so far, which yielded 4.6% based on IPO price of 54 sen. The stellar performance was mainly because of ECONBHD’s stronger fundamentals since IPO as: (i) the group was able to maintain its orderbook size at RM400.0-RM500.0m, and (ii) margins showed improvements, from 6.3% in 3Q14 (IPO) to 11.0% in its latest 3Q15 quarterly result.

· Margin expansion on track. Thus far, the group has kept its promise regarding margin improvements. 9M15 net margin of 10.0% was higher than that of 9M14’s 7.7%. We understand that the improvement was achieved after utilizing the IPO proceeds to invest in new machineries to improve efficiency. Total capex spending YTD is RM28.9m. Although there are no absolute margin targets, the management mentioned that they would strive to improve margins or at least maintain it at the current 10.0% level. This is higher than the average construction net margin of about 6.0%.

· Healthy orderbook of RM567.0m. After securing RM50.0m new jobs recently on 17th June 2015, the group’s outstanding orderbook stands at RM567.0m. Based on the group’s orderbook life span of 9-18 months, this orderbook amount should provide visibility until FY16.

· Piling industry outlook still bright despite slowdown in property market. Most of the piling works are from high-rise developments and there are concerns of a softer property market (particularly in high-rise towers/condos segment), that may not bode well for piling players like ECONBHD. However, we think the piling industry’s outlook may not be as bad because: (i) the infrastructure construction segment (e.g. railways, highways) is still robust, driven by 11MP, (ii) there are plenty of upcoming development/re-development projects to be undertaken in the Klang Valley that will benefit piling players such as Tradewinds Centre, BBCC, Harrods Hotel, Kampung Baru, Bandar Malaysia, Kwasa Damansara. Hence, it is not surprising that the group is tendering for >RM1.0b worth of projects. Majority of the tenders currently consists of property development projects in the Klang Valley. We like to highlight that most of the group’s clientele are big contractors and well-known developers such as: AZRB, Glomac, Selangor Dredging, Ecoworld, SP Setia, Symphony Life, IOI, OSK Property, i-City and Hap Seng.

· Going forward, we estimate the group’s net profit to grow by 47% and 14% to RM45.6m and RM51.9m, respectively, in FY15-16E driven by: (i) healthy orderbook of >RM500m, (ii) sustainable orderbook replenishment of RM400m orderbook every year, and (iii) sustainable 10.0% net margin.

· TRADING BUY with a Fair Value of RM1.21. The stock is currently trading at FY16E PER of 11.2x. At this level, we reckon that ECONBHD is still undervalued judging from its strong fundamentals such as: (i) strong financials (i.e. net cash position, superior earnings growth and improving margins), and (ii) compelling piling industry prospects. Ascribing target PER of 12.5x (in line with our target PER for PTARAS), ECONBHD is fairly valued at RM1.21. TRADING BUY.

Source: Kenanga Research - 23 Jun 2015