The Malaysian Reserve, 18 June 2014 - Econpile underpinned by strong foundation

The Malaysian Reserve , 18 June 2014

Investment Highlights ECONPILE Holdings Bhd (EHB), founded in 1987, is the leading player in piling and foundation services in the local construction industry.

The group provides a comprehensive range of piling solutions, earthworks services and substructure and basement construction works.

The group is ISO 9001:2008 accredited for quality management and holds a Grade 7 licence that enables its participation in tenders for projects with unlimited value.

Expertise in the property segment. Outstanding order-book stands at RM450m comprising RM400m in property projects and RM50m in infrastructure projects.

Meanwhile, the group is targeting RM300m of orderbook replenishment on the back of RM2b worth of projects it is tendering, with more focus being aimed at the property segment, which is the group's forte and thus giving EHB better margins as compared to infrastructure works.

Piling and foundation is a safe bet. As piling and foundation works are usually in the early stage of construction works, payment and cashflow risks are substantially' reduced.

Besides, the segment, which constitutes 10%-15% of the total construction value, provides better profit margins of more than 10%, which is relatively higher than the 6%-10% from civil works. The group has delivered more than RM2b worth of local projects and its foothold can be seen all over Malaysia.

Partnering big names. The group has been working together with established developers in town including Selan-gor Dredging Bhd, Putrajaya Perdana Bhd, Tropicana Corp Bhd, and Glomac Bhd for more than 10 years and also enjoy-close relationship with IOI Properties Bhd.

With near term growth strategies focussed in getting the right product mix by concentrating in the property segment, the group, however adopts conservative and selective approach in prioritising the right project with lower risk and wrorking with the right partner.

Sturdy Balance Sheet
Net gearing is low at 0.05x as of 9MFY14 while the group is expected to be in net cash position post-initial public offering (IPO) with the proceeds projected to increase the cash level to RM24m or 10 sen/share. That would pave the way for the group to declare decent dividend to shareholders with the group promising to pay out not less than 20% of its profit after tax.

We estimate DPS of 1.5 sen/ share in FY15 by assuming a payout ratio of 25%, translating into a yield of 2.8%

Key Risks
- Low floating of shares post-IPO.
- Health of the construction/ property industry.
- Failure in securing new contracts.
- Availability/Fluctuations in prices of raw materials.
- Dependence on foreign labour.
- Changes in government regulation.

Recommendation
We derived our fair value by ascribing llxPERto itsFY2015F EPS of 6.2 sen, which is in line with the multiples we peg to other small-cap construction counters.

However, the valuation is a slight discount against its closest peer, Pintaras Java Bhd, which is currently trading close to 12x forward PE as the latter has bigger market capitalisation of c.RM700m and commands better profit margin.

The fair value offers 26% upside from the IPO price of RM0.54, which suggests a forward PE of 8.7x, thus providing investors cheap entrance opportunity to exposure in the piling and foundation industry.

Background
Established in 1987, EHP is one of the leading players in the piling and foundation services industry in Malaysia. The business started off with driven pilings works and later progressed to bored pilings services..