Case Study of Econpile Holdings Berhad (5253)

Overview

Econpile Holdings Berhad is an investment holdings company established by the Group of Managing Director, Mr The Cheng Eng, which principally involved as a leading specialists’ provider for piling and foundation services in Malaysia. There are two wholly subsidiaries of companies under ECONBHD such as Econpile (M) Sdn Bhd and Tropical Broadway Sdn Bhd. Econpile (M) Sdn Bhd engaged in the business of piling and foundation services for property development while for Tropical Broadway Sdn Bhd engaged in the business of rental for investment property and machinery. ECONBHD also holds a Grade 7 License from the Construction Industry Development Board of Malaysia, which allows the Group to tender projects of unlimited values in the categories of building and infrastructure works.

Business Model

ECONBHD provides piling and foundation services such as earth retaining systems, earthworks, substructure and basement construction works, which are mainly for high-rise property development and infrastructure nationwide such as in Klang Valley, Penang, Johor, Pahang, Sabah and Sarawak. The notable projects completed since inception such as bored piling for Klang Valley Mass Rapid Transit, Pavilion Shopping Centre, as well as a deep basement for Elite Pavilion, W Hotel and The Residences. The company also involved in the construction of bridges, elevated highways, electrified-double tracking projects and power plants. ECONBHD also generates some recurring revenue from construction contracts and rental income such as investment holding rental of investment properties and machinery, trading of machinery and some related accessories at a full-fledged workshop located in Rawang.

Financial Review

Based on the past 5 financial years as above, the net profit for the year is increasing years by years start from FY2014 (+11.32%), FY2015 (+50.27%), FY2016 (+44.91%), FY2017 (+19.58%) until FY2018 (7.84%), marking its best-ever full-year net profit.

According to the Annual Report FY2018, it stated that the revenue derived from piling and foundation works for property developments contributed of RM548.5 million equivalent to 75.3% of the year 2018 group revenue (shown above), with a growth of 4.7% from RM523.3 million previously. While for the infrastructure and other projects, it increased more than three times from RM49.6 million, contributed to the remaining of RM179.9 million or 24.7%.

Gross profit increased 1.4% from RM130.1 million in FY2017 to RM131.9 million in FY2018 due to the larger proportion of infrastructure works. The gross profit margin lower from 22.4% in FY2017 to 18.1% in FY2018 mainly due to the hike of steel price.

ECONBHD also incurred with higher operating expenses of RM26.7 million in FY2018 from RM24.9 million in FY2017 due to higher expenditure managing the larger base of ongoing projects. It resulted in the finance costs of the company also increased by 41% from RM1.7 million in FY2017 to RM2.4 million in FY2018.

Based on the chart shown above, Since the finance cost is increasing from 2015 until 2018, is the company able to pay back its liabilities? Based on my computation of liquidity ratio, indicate that ECONBHD has a current ratio of 2.086 times in FY2018 compared to 2.177 times in FY2017. Although there is a slightly decreasing in this ratio, the company still do not face any liquidity problems and are capable of paying off the obligations when comes to due in FY2018 by using the current assets such as trade and other receivables, prepayments, other assets, cash and cash equivalents.

Cash Flow Statement

Net Cash from Operating activities in FY2018 amounted to RM11.3 million, which is lower than the FY2017 figure of RM52.8 million. But it still considers healthy with this amount of cash generated.

The Net cash from investing is decreased in FY2018, which is RM4.4 million, while RM 32.2 million in FY2017 due to lower capital expenditure.

Net cash from financing activities in FY2018 is in a negative figure which is (- RM19.2 million), while in FY2017 is (- RM22.452 million). It was due to 2 factor, lower dividend payout in 2018 camper to 2017 and debt reducing by paying back partial loan.

Total cash and cash equivalents of ECONBHD has decreased to RM24.2 million in FY2018 compared to RM36.4 million in FY2017 to fund the working capital requirements of a larger project portfolio.

Future Prospect & Challenges

According to Annual Report FY2018, management has stated that ECONBHD has an outstanding order book of RM1.1 billion and it successfully secured over of RM450 million in new projects, which comprising a healthy mix of new property development and infrastructure projects.

The biggest project is known as Pavillion Damansara Heights, which sits between two Mass Rapid Transit stations. In FY2018, they have carried out the basement works in Phase One as well as moving into initial stages of Phase Two. However, ECONBHD also successfully tendered for and won its first Light Rail Transit (LRT) contract amounting to RM208.7 million to undertake the bored piling and general infrastructure works for Packages GS04 of the 37 kilometres of LRT3 Line. Besides, ECONBHD also secured RM119.1 million contracts to perform the bored piling, projects, pile caps substructure and basement work for the redevelopment of TNB quarters. Last but not least, some investment banks stated that ECONBHD could be a potential beneficiary for the revival of East Coast Rail Link (ECRL) project. As a specialist’s contractors, ECONBHD may responsible for piling for this project. (Sources: TheSunDaily 15Apr2019)

How can ECONBHD maintain its strong record spanning for three decades? With experience technical expertise it helps the company to secure more jobs and capture for future growth. The strategies that they implement is to submit tender for property-related projects and optimise the fleet and workforce capability.

In line with the new government, it brings an adverse impact on the infrastructure sector in Malaysia. ECONBHD continues to tender for mixed development projects in Klang Valley to secure more property related jobs going forwards as their core expertise of piling works and substructure works in an urban environment. Besides, ECONBHD also enhances its operational efficiency by enhancing the skillsets of their workforce through extensive training to improve their business process with stringent planning and careful execution.

My Insight

Based on my calculation, Econpile Holdings Berhad has a fair value of RM1.446. The current market value of ECONBHD is RM0.785 (Based on 23 August 2019 is undervalued. While for dividend, ECONBHD has declared a first single-tier interim dividend with a total of 1.6 Sen in respect of FY2018. Based on the AR 2018, the dividend payout of RM21.4 million constitute of 24.6% of net profit in FY2018 thus complying with a minimum of 20% dividend policy. ECONBHD also have a beta of 1.783 (500days) indicates that the company has slightly volatile than the market. Based on my computation of CAGR calculation, ECONBHD has an expected market return of 6.24%.

In my opinion, the prospect of this company is very exciting because ECONBHD successfully secured a few projects and this company have a very strong fundamental. Even though the Return on Equity has a slightly decreasing from FY2016 to FY2018, it still able to achieve an ROE with double-digit which is 23.563 times. I believe that the company can achieve a fantastic performance in the future.

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Written by Stella Goh | 26 August 2019

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