• Keep BUY, new MYR0.69 TP (from MYR0.71), 36% upside. 9MFY24 (Jun) core net loss of MYR17m missed our and Street’s full-year net loss estimates of MYR16m and MYR6m due to higher-than-expected operating costs, which pressured margins of ongoing jobs. Nonetheless, we are optimistic on Econpile’s prospects to secure more projects in the next two years, including mega projects like the Sungai Klang Link elevated highway (SKL) and Mass Rapid Transit (MRT) 3, which may lead to a turnaround in FY25.

• Results review. ECON recorded 20.5% YoY revenue growth for 9MFY24, thanks to higher progress billing from private property development projects. However, GP margin narrowed to 1% (9MFY23: 3.9%) due to higher cost of sales in 9MFY24. QoQ, core net loss was lower in 3QFY24 at MYR2.8m vs MYR10.3m in 2QFY24 amidst the absence of a provision for project cost overruns in the current quarter.

• Outstanding orderbook of c.MYR400m (2QFY23: MYR405m) should keep the group busy for the next 12 months. YTD new job wins for FY24 (as at end- May) are estimated at MYR392m, including road upgrades at Cameron Highlands (MYR66m), SOHO projects (MYR101m), and Eden Residence (MYR83m). This indicates a more active awarding of construction jobs compared to the past two years’ <MYR300m. With the construction sector showing some signs of upturn, we expect ECON to secure additional projects, leveraging on its prominent position in railway and highway projects. Potential wins for ECON include local infrastructure projects such as the Penang light rail transit (LRT), MRT3, and SKL, as well as private residential projects, semiconductor factories, data centres, and two projects in Cambodia (worth USD10m each).

• Forecasts and valuation. As earnings missed estimates, we slash FY24-25F earnings by 13-14% after factoring in more conservative margin assumptions while FY26F earnings are unchanged. Our new MYR0.69 TP is still pegged to a 2.8x target P/BV with a 6% ESG discount due to the lack of disclosures on emissions. We view the target P/BV of 2.8x (+1SD from its 10-year mean P/BV) as justified, reflecting ECON’s role as a subcontractor in big-ticket projects such as MRT2 (MYR180m) and LRT3 (MYR208.7m).

• Rerating catalysts include faster-than-expected rollout of the SKL, MRT3, and Kuala Lumpur-Singapore High-Speed Railway projects.

• Downside risks: Slower-than-expected rollout of mega infrastructure projects and volatile material prices.

Source: RHB Research - 31 May 2024