Investment Highlights

• We reduce our FY21–23F net profit forecasts by 42%, 2% and 1% respectively but maintain our fair value at RM0.18 based on 8x revised fully diluted FY22F EPS (from 8x fully diluted CY21 EPS previously), in line with our benchmark forward target PE of 8x for small-cap construction stocks. There is no adjustment for ESG based on a 3-star rating as appraised by us (Exhibit 4). Maintain UNDERWEIGHT.

• Key highlights from yesterday’s analyst briefing are:

1. Econpile is eyeing mainly small piling/substructure jobs (RM10mil to RM30mil in terms of size) locally at present. There is a lack sizeable piling/substructure projects (>RM100mil) in the market at present as there are limited public infrastructure projects being rolled out by the government. Econpile believes that its target for new job wins of RM500mil in FY21F is within reach with these potential new small jobs. Recall, YTD FY21F, it has secured RM403mil new jobs, including a US$85.7mil (RM347.6mil) piling and substructure work subcontract for an integrated entertainment complex in Phnom Penh, Cambodia. To be prudent, we are keeping our forecasts that assume Econpile securing about RM400mil worth of new jobs in FY21F and subsequently fall to RM300mil annually in FY22–23F (in the absence of lumpy jobs).
    
2. Econpile has mobilised 10% of its piling assets and 58 Malaysian staff members to Cambodia to execute its first major overseas contract. It acknowledged that carrying out a new job in an overseas market amidst the pandemic is no walk in the park (more so, apparently, Cambodia is experiencing rising Covid-19 infections at the moment). Its staff members had to undergo a 14-day guarantee upon arrival. It is also learning from scratch the local supply chain. On a brighter note, now being on the ground in a new high-growth construction market, Econpile is ready to “scout for more opportunities”.
    
3. Econpile does not expect a significant improvement in margins over the immediate term given various operational restrictions under the new norms and additional costs incurred with regards to migrant worker welfare. Econpile registered an EBIT margin of 6% for 1HFY21 (vs. low teens during better times). We now assume an average EBIT margin of 6% in FY21F, before recovering to 10% in FY22–23F backed by the highmargin Cambodia job.

• We maintain our view that the government will have very limited room for fiscal manoeuvre in 2021 given the elevated national debt, even before the pandemic. The government’s fiscal position has been weighed down further by the economic impact of the pandemic (including reduced tax and petroleum revenues), as well as the massive relief spending to cushion the economic impact of the pandemic. All these have culminated in Fitch Ratings’ Dec 2020 downgrade of Malaysia’s long-term foreign-currency issuer default rating to ‘BBB+’ from ‘A-‘, on the heels of S&P Global Ratings’ June 2020 downgrade of Malaysia’s outlook to negative from stable.

• Under these circumstances, we believe the government is unlikely to roll out new public infrastructure projects in a major way over the short term. Also, given the suspension of parliament following the declaration of a state of emergency until 1 Aug 2021, the tabling of the 12th Malaysia Plan (which, among others, will earmark mega public infrastructure projects to be implemented in 2021–2025) scheduled for March 2021 could now be put on the back burner.

• 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.

• Econpile’s valuations are excessive at 17–31x forward earnings on muted earnings growth prospects.

Source: AmInvest Research - 2 Mar 2021