• D/G to SELL from Neutral, MYR0.16 TP with 29% downside. Econpile’s 1HFY23 (Jun) core net loss of MYR4.4m (1HFY22: -MYR11.2m) missed our and Street’s full-year earnings estimates of MYR14m and MYR13m, as material cost pressures remained a bane for earnings despite easing from the peak in 1QCY22. We believe the current share price uptick has outpaced its early stage of recovery in fundamentals. Valuations are lofty, with the stock trading at 19x FY24F P/E, >+2SD from the KLCON index’s 5-year mean, especially in the absence of mega infrastructure projects.

• Results review. The GP margin in 2QFY23 expanded to 7.5% (2QFY22: 0.6%) partly supported by the Naga 3 project in Cambodia (>60% completion). ECON also saw a MYR0.4m core profit in 2QFY23 after five straight quarters of losses, as its latest contract wins have likely taken into account the higher material costs.

• Operational updates. ECON’s outstanding orderbook as at end CY22 stood at MYR444m (1.2x cover ratio) backed by a MYR1bn tenderbook containing one bid for a new Cambodian project worth >MYR40m, amongst other local projects – mostly in the property development space. Meanwhile, ECON received 100 foreign workers at end Dec 2022, with approval to bring in another 50 in the next two months. This enables ECON to ramp up work progress at its sites, preventing further cost overruns that impact margins.

• While ECON is displaying signs of a recovery, we are cognisant of the uncertain landscape for public infrastructure projects, which should serve as a rerating catalyst for the share price. It is widely expected that contract awards for the Mass Rapid Transit 3 (MRT3) will be rolled out in 1H23, with construction starting in early CY24. Awards for subcontractors like ECON may take longer – probably sometime in 2Q24. There are also risks of a downward revision in the MRT3 project, which could shrink the pie for subcontractors. As such, we advocate investors cash-in on the rich valuations, with no new large infrastructure projects in the near term. Its earnings base may not revert to pre-pandemic levels of MYR40-90m in the near future, given the new norm of elevated building material prices.

• As earnings missed estimates, we slash FY23F earnings by 14% to reflect a more conservative margin assumption, but leave FY24-25F estimates unchanged, incorporating better cost management. Our TP remains at MYR0.16, with a target P/E of 14x pegged to FY24F EPS (given the higher barriers to entry in the piling sub-sector) after ascribing a 4% ESG discount to our intrinsic value, based on our proprietary methodology.

• Upside risks: Faster-than-expected rollout of mega infrastructure projects and a prolonged downtrend in building material costs.

Source: RHB Research - 24 Feb 2023