Strong job flows ahead. In the upcoming months, we are anticipating a huge influx of construction projects awards, i.e. KVMRT2, LRT3, SUKE, EKVE, DUKE, Warisan 118, BBCC, Gemas-Johor double track and others, which would require extensive piling and foundation works. Hence, we are confident in ECONBHD bagging a few of these jobs given their strong track record and wide range of solutions/enhancements. To recap, ECONBHD has the expertise of executing jobs priced >RM100m and had previously executed the Sungai Buloh-Kajang KVMRT1 package and we believe they will be a favourite to secure packages from KVMRT2.

Replenishment target of RM450m-RM500m for FY16-17. YTD, ECONBHD has secured RM420m worth of jobs making up 93% of our FY16 replenishment target and is 31% above management’s initial target of RM320m. We feel our orderbook replenishment target is achievable given the slew of upcoming infrastructure jobs for FY17. Currently, ECONBHD’s outstanding orderbook which mainly comprise building works stands at c.RM680m providing earnings visibility for 12-15 months.

Margins improved but to see slight pressure. YoY-Ytd, ECONBHD’s 1H16 net margins improved by 5.1ppt to 14.7% underpinned by: (i) favourable project mix, (ii) lower steel prices, and (iii) improved machine utilisation/efficiency. However, moving forward, we expect FY17 margins to see some pressure and drop from 14% (FY16) to c.12% due to: (i) the contribution of more infrastructure works, which normally commands thinner margins as a result of higher mobilisation cost and (ii) increasing steel prices. Nonetheless, the forecast FY17 margin level of 12% is still higher than ECONBHD’s 3-year historical average margins of 8.5%. To recap, ECONBHD saw margin compressions in FY13-14 due to the unforeseen cost overruns incurred in their KVMRT 1 project.

Strong balance sheet to position for future growth. At current machine utilisation levels of 80-85%, we expect additional CAPEX in FY17 as management might increase capacity to cope with their growing orderbook. Based on latest 2Q16 quarterly results, ECONBHD is at a net cash position of RM12.6m and we foresee them to maintain their net cash position at c.RM27.0m despite our estimated increase in CAPEX of RM49m for FY17. To recap, ECONBHD’s average CAPEX for FY13-FY15 is RM26m.

Pitted against peers. Within the Malaysian piling scene, ECONBHD has only two listed peers namely PTARAS and IKHMAS. Among the three, IKHMAS is a laggard due to weaker FY16 net margins of 10.0% and higher net gearing of 0.2x while ECONBHD and PTARAS are both in net cash positions. While we expect the competition in the piling industry to remain stiff, we deem ECONBHD to have the slight upper hand due to: (i) stronger 2-year Fwd. earnings CAGR of 21.1% against PTARAS’s consensus estimates of 7.6%, (ii) better orderbook replenishment prospects, (iii) larger capacity to execute c.RM500m worth of jobs per annum against PTARAS’s RM250m, and (iv) healthy orderbook of RM680m translating to consistent earnings and better earnings visibility.

Not-rated. While we like ECONBHD for its strong job news flow and decent growth, we are neutral on the stock as we value ECONBHD at 11.0x FY17 PER with a TP of RM1.41 based on +2SD average Fwd PER since it’s listing, as we believe that the stock has been fairly valued at its +2SD levels as most positives have been priced in at this juncture. To recap, its share price has performed relatively well with 28% return since its last briefing dated back in 25th-Feb-16. Furthermore, it is trading at a slight premium over peers’ average trading range of 10.3x. Nonetheless, we still like the stock for its strong fundamentals and would re-look at it should there be any further weakness in share price.

Source: Kenanga Research - 26 Apr 2016