Econpile Holdings - Still Not Out of the Woods; Maintain SELL

Price Target: 
Price Call: 
Last Price: 
-0.145 (50.88%)
  • Maintain SELL, new MYR0.14 TP from MYR0.16, 25% downside. 9MFY23 (Jun) core net loss of MYR4.9m (9MFY22: -MYR27.4m) missed our and Street’s full-year earnings estimates of MYR2m and MYR7m – as residual material cost pressures remain a bane for earnings despite an easing from the 1QCY22’s peak. In light of the absence of mega infrastructure projects, valuations are lofty – the stock is trading at 18x FY24F P/E, ie >+2SD from the KLCON index’s 5-year mean P/E.
  • Results review. In 3QFY23, ECON recorded a core loss of MYR0.5m (1QFY22: -MYR16.2m) as residual cost pressures from private property projects secured in FY20-21 are receding as they approach their tail-ends. Additional support came from the progress of the Naga 3 entertainment complex project in Cambodia (completion: >60%).
  • Operational updates. ECON’s outstanding orderbook as at end 3QFY23 stood at MYR405m (1.1x cover ratio vs peers’ 3x average). This is backed by a MYR1bn tenderbook containing one bid for a new Cambodian project worth >MYR40m amongst other local projects – mostly under the private sector property development space. Labour-wise, ECON has fully received 100 foreign workers in late 2022. This enables the company to ramp up work progress at its construction sites, preventing further cost overruns.
  • Outlook. With no major updates regarding the cost review for the Mass Rapid Transit 3 (MRT3) so far – we believe the wait for ECON to secure any infrastructure-related jobs could continue given its intended participation as a subcontractor. Assuming the same timeline for MRT2 (Figure 2), the company may only get to know bid outcomes c.7 months after the expected awarding of main civil work packages in 2HCY23. The risk of slower-than-expected property launches by developers could also dampen ECON’s jobs replenishment. Its earnings base may also not revert to pre-pandemic levels of MYR40-90m in the near future, given the persistently elevating building materials prices.
  • As earnings missed estimates, we slash FY23F-25F earnings by 9-13% to reflect a more conservative margins assumption. We arrive at a new MYR0.14 TP pegged to an unchanged 14x target P/E to reflect ECON’s higher chance of clinching MRT3 jobs vis-à-vis other earthworks and piling contractors. This is also after ascribing a 4% ESG discount to our intrinsic value based on our proprietary ESG scoring methodology. Upside risks: Faster-than-expected rollout of mega infrastructure projects and a prolonged downtrend in building material costs.
  • ESG framework update. As there is now greater focus on the E pillar on critical climate change issues, we tweaked our ESG weightage. Henceforth, we assign a weightage of 50% to the E pillar, followed by 25% each to the S and G pillars. Further details are in our 2 May thematic research note titled Envisioning a Better Future.

Source: RHB Research - 25 May 2023

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