Background. Econpile Bhd (Econpile) is the largest piling and foundation service provider in Malaysia with around 13% market share in the industry. It is one of the only two piling contractors listed on the Main Market. Econpile has more than 25 years’ experience in the industry and currently offering 3 types of piling solutions namely bored piles, driven piles and jack-in-piles and also foundation services. These solutions and services are often used for medium to high rise buildings located at high density or congested area. Hence, its expertise is highly demanded in Klang Valley, Johor’s Iskandar and Penang.

Company highlights. Econpile is embarking on new growth strategy that focuses in improving operation efficiency and securing higher margin jobs. This has been reflected in its 1H15’s revenue breakdown and order book. 90% of its 1H15 revenue derived from the property development which usually provides 15-20% gross margin whereas infrastructure gross margin is at below 15%. Besides, the new contracts secured post IPO are mainly from property and commercial developments projects indicating stronger margin ahead. Thus, we expect Econpile’s net margin will expand by 1-2% over the next 2 years to 11-12% from FY14’s 7.4%.

Healthy order book. As at April’15, Econpile’s order book stands at above RM540m and it will provide stable earnings visibility to the Group for the next 18 months. Since June’14, Econpile has secured RM413.7m worth of jobs and we have an assumption that the Group will secure at least RM430m worth of new contracts in FY16.

Risk

• Cooling property sector
• Infrastructure projects roll out delayed
• Failure to secure substantial contracts
• Volatility in raw material prices

Recommendation We are initiating coverage on Econpile with an Outperform rating and fair value of RM1.34 based on FY16 EPS of 11.9sen pegged to the construction industry PE of 13x. It represents 20% upside from current price with about 2 sen dividend per share (dps) or 2% dividend yield in FY16.

Source: Mercury Securities - 26 May 2015