Econpile Holdings Bhd's unit, Econpile (M) Sdn Bhd, has bagged a RM21.4m contract from Allevia Sdn Bhd, a unit of UEM Sunrise Bhd. The contract entails earthworks, piling, pile caps, substructure, elevated road and earth system works for a 44-storey and a 40-storey condominium development with basement and podium carparks and a level of recreation.
The overall duration of the contract is about 14 months and works are expected to commence in July 2020. We believe that the aforementioned project will generate mid-teens EBITDA margins in line with historical average for piling works in high rise property development projects. This also marks the first contract secured by Econpile for FY21, which makes up to 7.1% our assumption of RM400.0m for the year.
The latest win bumps Econpile's outstanding orderbook to RM700.0m, which translates to an orderbook-to-cover ratio of 1.1x against FY19 revenue of RM663.3m and will provide earnings visibility till final quarter of year 2021. We are sanguine that earnings recovery will be materialise from FY21 on the back of the resumption of supply chain such as concrete, cement, steel and etc.
We believe that with the first major contract win for the year may see acceleration in contracts over the foreseeable future as businesses resume their operations. The latest win is also a testament to Econpile’s established track record having forged a solid business relationship with their clientele which place the group as one of the forerunners in bidding future projects.
Valuation & Recommendation
With Econpile’s orderbook replenishment coming within our estimates, we made no changes to our earnings forecast. We maintained our SELL recommendation on Econpile with an unchanged target price RM0.51 as prospective PERs trading at 56.7x 18.4x for FY20f and FY21f respectively are deemed to be fairly stretched at current juncture.
Our target price is derived by ascribing an unchanged target PER of 15.0x to its FY21 EPS of 3.4 sen. Nevertheless, we believe that a potential re-rating is in the cards, should Econpile’s orderbook replenishment exceed our assumption at RM400.0m for FY21 or margins to come above our assumptions.
Risks to our recommendation and target price include stronger-than-expected orderbook replenishment rate. Lower raw material prices and labour cost would potentially improve margins. Faster-than-expected project execution could also improve Econpile’s efficiency to deploy existing machineries for future orders
Source: Mplus Research - 16 Jul 2020