The Edge Financial Daily, 18 June 2014 - Econpile cash level to increase to RM24m post-ipo

The Edge Financial Daily , 18 June 2014

Econpile Holdings Bhd
Initial public offer (IPO) note with call to subscribe at target price of 68 sen:
Econpile, founded in 1987, is a leading player in piling and foundation services in the local construction industry. It provides a comprehensive range of piling solutions, earthworks services and substructure and basement construction works.

The group’s outstanding order book stands at RM450 million, comprising RM400 million in property projects and RM50 million in infrastructure projects. It is targeting an order book replenishment of RM300 million on the back of RM2 billion worth of projects it is tendering for. It is focusing on the property segment, which is the company’s forte and gives it better margins compared to infrastructure projects.

As piling and foundation works are usually carried out in the early stages of construction, payment and cash flow risks are substantially reduced. This segment, which constitutes 10% to 15% of the total construction value, provides better profit margin of more than 10%, which is relatively higher than the 6% to 10% from civil works. The group has delivered more than RM2 billion worth of local projects and its foothold can be seen all over Malaysia.

It has worked with established developers including Selangor Dredging Bhd, Putrajaya Perdana Bhd, Tropicana Corp Bhd and Glomac Bhd for more than 10 years and also enjoy a close relationship with IOI Properties Group Bhd.

With its near-term growth strategies focused on getting the right product mix by concentrating on the property segment, the group however has adopted a conservative and selective approach in prioritising projects with lower risk and working with the right partner.

Its net gearing is low at 0.05 times as at the end of the nine months to March 31, 2014 (9MFY14). Econpile is expected to be in net cash position post-IPO with the proceeds projected to increase its cash level to RM24 million or 10 sen per share. That will pave the way for the company to declare a decent dividend to shareholders — it has promised to pay out not less than 20% of its profit after tax. We estimate dividend per share of 1.5 sen per share in FY15 ending June 30 by assuming a payout ratio of 25%, translating into a yield of 2.8%.

“Subscribe” with fair value of 68 sen. We derived our fair value by ascribing 11 times price-earnings ratio (PER) to its FY15F earnings per share 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 to its closest peer Pintaras Jaya Bhd, which is currently trading close to 12 times forward PER as the latter has a bigger market capitalisation of some RM700 million and commands better profit margin.

The fair value offers 26% upside from the IPO price of 54 sen, which suggests a forward PER of 8.7 times, thus providing investors cheap entrance opportunity to exposure in the piling and foundation industry. — JF Apex Research, June 17