• Still NEUTRAL, new MYR0.22 TP from MYR0.28, 4.3% downside and c.1% yield. Econpile delivered a 9MFY22 (Jun) core net loss of MYR27.4m vs our and Street’s full-year earnings estimates of MYR4m and MYR8.2m – attributed to gross margin compression, on elevated material prices and an underperforming project. Material prices are likely to remain high, given the global inflationary pressures which could dampen profitability.

• Construction segment faced losses. YoY, 3QFY22 saw lower revenue of MYR92.0m (3QFY21: MYR129.6m). Cost of sales was 17.6% lower YoY but 14% higher QoQ, leading to a gross loss of MYR7.6m for the quarter. Unfortunately, orders won before the Russia-Ukraine war were impacted by price hikes, and there is limited room for partial claims or negotiations, in the absence of the variation of price clause, as the majority of its projects are not government related. We understand that in 1QCY21, the average prices of steel bars and bulk cement were 16% and 40% higher YoY. Other factors that contributed to the lacklustre quarterly performance include losses incurred by an infrastructure project completed during the quarter.

• Job win details. So far for FY22, Econpile has secured new jobs worth MYR155.4m, with the two recent jobs awarded back-to-back in April and May, suggesting that job flows are likely normalising, albeit at a measurable pace. Meanwhile, its total outstanding construction orderbook as at end 3QFY22 stood at MYR550bn, which translates into an orderbook/revenue cover ratio of c.1.3x. A rerating catalyst would be the award related to the Mass Rapid Transit 3 (MRT3) works, given Econpile’s exposure to MRT2 jobs, worth a total of c.MYR180m. Hence, our job replenishment target for FY23-24F is MYR250m for each year, to account for this.

• Earnings estimates. Post results, we are now forecasting a net loss for FY22, while we slash FY23-24F earnings by 22% and 21% to impute lower construction revenue recognition and subsisting raw material cost hikes. Our target P/E of 14x (a premium to the KLCON Index’s forward P/E of 12.8x), pegged to our FY23F EPS, is retained on the premise that Econpile’s infrastructure jobs could potentially grow once contracts are rolled out for the MRT3 project. All in, our TP is revised lower to MYR0.22 after ascribing a 4% ESG discount onto our intrinsic value, based on our proprietary ESG scoring methodology. We stay NEUTRAL on the stock as its net gearing ratio is manageable at 0.16x, which may enable it to gear for large projects, although hurdles could remain in the form of high building material costs and labour shortages.

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

Source: RHB Research - 26 May 2022