Econpile Holdings Bhd
(June 23, RM1.08)
Recommend trading buy with a fair value of RM1.21: Recall that we issued an initial public offering (IPO) note on Econpile Holdings last year with a “subscribe” rating. IPO investors who are still holding on to this stock would have enjoyed a gross return of 106.6% over 12 months (including dividends). 

The stock price jumped by 102% with a 2.5 sen dividend paid out so far which yielded 4.6% based on the IPO price of 54 sen. The stellar performance was mainly because of Econpile’s stronger fundamentals since the IPO as the group was able to maintain its order book size at RM400 million to RM500 million. Its margins showed improvement, from 6.3% in the third quarter of financial year 2014 (3QFY14) to 11% in its latest 3QFY15 quarterly results.

Thus far, the group has kept its promise on its margin improvements. Its nine-month (9M) FY15 net margin of 10% was higher than 9MFY14’s 7.7%. We understand that the improvement was achieved after utilising the IPO proceeds to invest in new machinery to improve efficiency. 

Its total capital expenditure year-to-date is RM28.9 million. Although there are no absolute margin targets, the management said the group would strive to improve its margins or at least maintain them at the current 10% level. This is higher than the average construction net margin of about 6%.

After securing RM50 million in new jobs last Wednesday, the group’s outstanding order book stands at RM567 million. Most of the piling works are from high-rise developments and there are concerns about a softer property market (particularly in the high-rise towers/condo segment), that may not bode well for piling players like Econpile. However, we think the piling industry’s outlook may not be as bad due to several factors. 

The infrastructure construction segment (railways, highways) is still robust, driven by the 11th Malaysia Plan. There are plenty of upcoming developments and redevelopment projects to be undertaken in the Klang Valley that will benefit piling players such as Tradewinds Centre, the Bukit Bintang City Centre project, Harrods Hotel, Kampung Baru redevelopment, Bandar Malaysia and Kwasa Damansara. Hence, it is not surprising that the group is tendering for more than RM1 billion worth of projects. Most of the tenders currently consist of property projects in the Klang Valley. We would like to highlight that most of the group’s clientele are big contractors and well-known developers such as: Ahmad Zaki Resources Bhd, Glomac Bhd, Selangor Dredging Bhd, Eco World Development Group Bhd, S P Setia Bhd, Symphony Life Bhd, IOI Properties Group Bhd, OSK Property Holdings Bhd, i-City and Hap Seng Consolidated Bhd.

We estimate that the group’s net profit will grow by 47% and 14% to RM45.6 million and RM51.9 million, respectively in FY15E to FY16E, driven by a healthy order book of more than RM500 million, sustainable order book replenishment of RM400 million every year, and sustainable 10% net margin. — Kenanga Research, June 23

This article first appeared in The Edge Financial Daily, on June 24, 2015.