On Wednesday, Macquarie Equities Research (MQ Research) released a report on Econpile, reiterating its “outperform” rating and maintaining Econpile as its top pick in the Malaysia Construction sector in anticipation of Econpile’s key re-rating catalyst, the East Coast Railway Link (ECRL) project, starting to hand out contracts in the first quarter of 2018 (1Q18). Outside of ECRL, Econpile’s management targets to secure a total of RM600 mil. in new orders this year.
Event
MQ Research reiterates an “outperform” rating on Econpile and retains it as its top pick in the Malaysia Construction sector as its key re-rating catalyst – the ECRL project – is expected to begin dishing out contracts in 1Q18. Excluding ECRL, management targets to secure a total of RM600 mil. in new orders in FY18E, with RM308 mil. of new orders already secured YTD. MQ Research believes potential order wins from the ECRL project could be the key determinant for Econpile to emulate or surpass the record order wins of RM1.2 bil. achieved in FY17. Econpile also expanded its capacity in FY17 to cater to the potentially large order wins in FY18E.
Impact
FY18E order wins to be supported by both infra and real estate work. In the near term, management hopes to secure another RM300mn of new contracts from real estate work, particularly the Damansara Town Centre project, among others. MQ Research believes ECRL will be management’s key focus at this juncture as this potentially lucrative contract could bring earnings visibility to Econpile up to FY22E. While management did not guide on the potential order size from ECRL, MQ Research estimates the order size could range between RM300mn–500mn. MQ Research maintains its order win target of RM1.2bn in FY18E, with every RM100mn order win impacting valuation by 1.5%.
Balance sheet remains stable, will likely go back to a net cash position. In 1Q18, Econpile ended the quarter with a net debt position of 6.2%. According to management, it managed to trim the receivables tremendously over the past 3 months, and it is confident that Econpile will go back to a net cash position again in the coming quarters. As for payment risks, out of 14 projects that are currently ongoing, only two projects are lagging behind in terms of payment.
LRT3 contract comes with construction management role. Recall that in mid-November 2017, AQRS awarded Econpile the substructure work of the LRT3 project in a contract worth RM209mn – MQ Research gathered that the contract came with a construction management role, which will bump the project’s gross margin by another 2–3%. MQ Research estimates LRT3 will bring a blended earnings before interest and taxes margin of 17% to Econpile, a considerably high margin for an infra project.
Earnings and Target Price Revision
MQ Research adjusts the share base due the share split, bonus issue and warrants. MQ Research also adjusts the earnings estimates based on the current progress of each project, as such FY18-20E earnings move by -6.7%/-5.8%/-6.2%, respectively. MQ Research’s target price (TP) moves from RM1.40 (post enlarged share base) to RM1.35. The RM1.35 TP is based on a 15x PE multiple to Econpile’s FY19E earnings per share.
Price Catalyst
12-month price target: RM1.35 based on a price-earnings ratio methodology.
Catalyst: awards of the ECRL project
Action and Recommendation
Outperform reiterated.
Source: Macquarie Research - 5 Jan 2018
