Investment Highlights

• We maintain our UNDERWEIGHT call, forecasts and FV of RM0.22 based on Econpile’s end-FY18 NTA, adjusted for a worst-case impairment of RM80.1mil outstanding payment from client ASM Development (KL) Sdn Bhd (the developer of Maju KL) under dispute. We abandon earnings-based valuation method for Econpile given its elevated earnings risk following a slew of negative earnings adjustments recently including sizeable cost overrun, a significant receivable impairment and a major contract dispute.

• Econpile has secured a RM44.7mil sub-contract from MMC-Gamuda JV for reinforced concrete box tunnel works for Hospital KL Station, MRT2. The latest job has boosted its YTD (FY June) job wins to RM620.2mil and outstanding order book to RM1bil (Exhibit 1). We are keeping our forecasts as Econpile’s FY19F YTD job wins are still broadly consistent with our assumption of RM600mil. For FY20–21F, we assume job wins of only RM500mil annually on the back of the slowdown in the local construction market.

• We maintain our view that the current slowdown in the local construction industry sector is no ordinary sector cyclical downturn, but a secular change to the sector’s fundamentals, triggered by: (1) a major cutback in public infrastructure spending over the medium term as the government adheres to fiscal prudence; and (2) the permanent reduction in overall margins for players in the absence of high-margin directly-negotiated government jobs, as the government observes higher standards of transparency and accountability in public procurement.

• We are also mindful of the acute oversupply situation in the high-rise residential, retail mall and office segments, which translates to weak prospects in property-related job wins for piling contractors like Econpile.

Source: AmInvest Research - 21 Mar 2019