Investment Highlights

• We maintain our 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 have abandoned 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. Maintain UNDERWEIGHT.

• Assuming 4QFY19F performance is to match that of 3QFY19), Econpile’s extrapolated FY19 net profit of RM24.1mil came in broadly within our full-year forecast of RM27.3mil, but missed full-year consensus estimates of RM38.6mil.

• Its 9MFY19 net profit plunged 97% YoY largely due to a RM33.9mil cost overrun from certain ongoing infrastructure and property projects, and a RM15.1mil trade receivable impairment reported in 2QFY19.

• On a brighter note, Econpile has secured new jobs worth RM638.6mil YTD in FY19F (vs. RM473.3mil in FY18) while its outstanding order book stands at RM1bil (Exhibit 2). For FY20–21F, we assume job wins of only RM500mil annually on the back of the slowdown in the local construction market.

• We acknowledge that the revival of the East Coast Rail Link (ECRL) and Bandar Malaysia projects shall result in more jobs available in the market for local construction players. However, we believe the market has not priced in enough risk premium to reflect: 1. The fact that the latest mega projects are driven by world-class Chinese contractors (and Chinese funding) which probably leaves the local contractors with only low-value/low-margin supporting roles in the projects; and 2. The fact that given the still elevated national debt, the government has no choice but to remain steadfastly committed to fiscal prudence which means the revival of the ECRL project could be a “zero-sum game” as it may impede the government’s ability to implement other public infrastructure projects.

Source: AmInvest Research - 28 May 2019