• Still NEUTRAL, new MYR0.16 TP from MYR0.22, 6% downside and c.2% yield. Econpile delivered an FY22 (Jun) core net loss of MYR40.7m vs our and Street’s full-year loss estimates of MYR12m – attributed to gross margin compression from elevated material prices and project delays. While material prices have exhibited signs of easing, we believe it will remain well above pre-pandemic levels, and continue exerting pressure on margins – making it hard to achieve pre-pandemic earnings levels of between MYR40m and MYR90m.

• Results review. FY22 revenue fell 11% YoY to MYR373.4m (FY21: MYR420m), outpacing the flattish cost of sales, which led to a gross loss of MYR13.1m for the year. Aside from supply chain tightness, we believe that the increase in budgeted construction costs – stemming from extension of time for certain projects – may have occurred due to the labour shortage. This overshadowed its progress billings from the Cambodia Naga 3 project, which has reached 50% completion. In FY22, Econpile only won two new jobs worth MYR155.4m, suggesting that job flows were rather tepid. In fact, this is the lowest annual job replenishment level since its listing. Total outstanding orderbook as at end 4QFY22 was at MYR444m, translating to orderbook/revenue cover ratio of c.1.2x.

• Outlook. So far in FY23, Econpile secured a MYR40m job from Ekovest (EKO MK, NR) for piling works at the Immigration, Custom and Quarantine Complex (ICQC) for the Rapid Transit System (RTS) Link between Johor Bahru and Singapore. The project is expected to fetch a gross margin of up to 10% with a 13-month tenure from 1 Sep. We think this is a good start for the financial year, with Econpile receiving approval to bring in 250 workers in the coming months. However, we believe input cost pressures will continue crimping margins, as prices of materials such as steel bars are still 30% above pre-pandemic levels despite the recent drop.

• Earnings estimates. We slash FY23-24F earnings by -27% and -27% to impute extension of time for construction projects, and the resulting additional operational cost pressures. Our FY25F profit is introduced with a job replenishment assumption of MYR300m. Our 14x target P/E (a premium to KLCON Index’s forward P/E of 12.2x), pegged to our FY23F EPS is retained on the premise that Econpile’s infrastructure jobs could potentially grow once contracts are rolled out for projects like the Mass Rapid Transit (MRT) 3 and Bayan Lepas Light Rapid Transit (LRT) (likely to be out in 1QCY23 for tier-2 level contractors). All in, our TP is revised lower to MYR0.16, after ascribing a 4% ESG discount onto our intrinsic value, based on our proprietary methodology. We stay NEUTRAL on the stock, which is trading at an unattractive 14x FY23F P/E, near its 5-year mean but +1.5SD from the KLCON Index’s 5-year average.

• Upside/downside risks: Success/failure in securing new contracts, and less/more intense competition among piling contractors.

Source: RHB Research - 30 Aug 2022