5 months had passed since Malaysia’s General Election.
Malaysia Finance Minister Lim Guan Eng (LGE) is spearheading an effort to clean up our nation’s balance sheet. His efforts have resulted in a series of deferments and cancellations of several mega-infrastructure projects nationwide. As I write, it is clear that LGE would continue on Malaysia’s austerity drive in the future.
It is unwelcoming news for local construction firms. Billion-Ringgit firms which include Gamuda, Sunway Construction, George Kent … etc had experienced a sharp drop in their stock prices with expectations of fewer contract tendering opportunities for infrastructure projects in the future.
Here is a question. Is it possible to find winners in the construction sector?
First, it is important to note that the construction industry is cyclical by nature. Hence, to me, it is not a question of whether the industry would recover in the future, but when. In this bad times, it is easier to spot which construction firms are afloat and which would sink.
Here, I’ll share my views on how to assess construction stocks from scratch and determine whether it would swim or sink in this tough times. I will use Econpile Holdings Bhd (Econpile) as a case study and thus, here are 5 things you need to know about Econpile before you invest.
#1: The Business
Founded in 1987, Econpile is a piling and foundation specialist in Malaysia.
It provides local infrastructure concessionaires and property developers a wide range of services which include earth retaining systems, earthworks, basement construction and substructure works. Presently, it holds a Grade 7 License from the Construction Industry Development Board (CIDB) of Malaysia and hence, is allowed to tender for projects of unlimited values in the country.
#2: The Management
The Cheng Eng and Pang Sar are substantial shareholders of Econpile with their direct shareholdings amounting to 27.25% and 21.83% of the company.
The Cheng Eng founded Econpile in 1987 and remains at the helm of leadership of the company as its Group Managing Director. His daughter, The Kun Ann sits in the board as its Executive Director. Meanwhile, Pang Sar is now appointed as the Group Chief Executive Officer (CEO) of the company.
As such, I learned that the directors’ interests are more aligned to shareholders as there are three directors out of six who have substantial stakes in the company (inclusive of The Kun Ann).
#3: The Financials
Econpile has reported consistent growth in both sales and profits over the past 7 years. Its revenues had increased from RM 207.6 million in 2011 to RM 728.4 million in 2018. It has resulted in growth in shareholders’ earnings, up from RM 11.3 million in 2011 to RM 87.1 million in 2018.
Source: Annual Reports of Econpile Holdings Bhd
Since its listing in 2014, Econpile has recorded a 5-Year Return on Equity (ROE) average of 23.87% per year. It means Econpile had generated as much as RM 23.87 in earnings per year, on average, from every RM 100.00 in shareholders’ equity from 2014 to 2018.
As at 30 June 2018, Econpile has non-current liabilities of RM 27.9 million and thus, has a gearing ratio of 7.54%. It has a current ratio of 2.09 where as much as 94.5% of its current assets are made up of trade and other receivables (TR). Three customers accounted for 49.4% of Econpile’s total TR and thus, possesses a concentration of credit risk. In other words, if one of these customers choose to delay or to default their payments, it would negatively impact the financial strength of Econpile in the future.
#4: Future Prospects
As at 30 June 2018, Econpile has 15 ongoing projects at various stages worth a total of RM 1.1 billion in order book. Most of these projects would continue to contribute earnings to Econpile in the financial year (FY) 2019. To name a few, the main contracts include:
Source: Invest Malaysia Kuala Lumpur 2018 Conference
As I write (27 October 2018), Econpile is trading at RM 0.66 a share.
In 2018, Econpile has reported earnings per share (EPS) of 6.51 sen. Hence, its current P/E Ratio is 10.13. It is slightly below its 5-Year P/E Average of 10.64.
As at 30 June 2018, Econpile has reported net assets of RM 0.28 a share. Thus, its current P/B Ratio is 2.36. It is slightly below its 5-Year P/B Average of 2.54.
In 2018, Econpile has paid out dividends per share (DPS) of 2.5 sen. As such, its dividend yield is 3.79% if it is capable to maintain its DPS at 2.5 sen for FY 2019. The yield is the highest since its IPO listing in 2014.
So, the question is: ‘Should I buy Econpile at RM 0.66?’
Frankly, an investment in Econpile has both merits and demerits. Here, I make a list of both:
- Completion Track Record of Multiple High-Profile Projects
- Consistent Growth in Sales and Profits over the Past 7 Years.
- High ROE as Econpile averages 23.87% a year from 2014 to 2018.
- Low Gearing Ratio of 7.54%.
- Order Book: RM 1.1 billion as at 30 June 2018.
- Most order books will expire in FY 2019, thus, lacks income visibility.
- Slow Replenishment of Order Book as contracts secured are smaller in size and shorter in duration.
- Reliance on Few Contracts for Substantial Income.
- Lacks Assets that Produce Recurring Income in Bad Times.
- Current assets predominantly made up of trade receivables. Its default would affect Econpile’s cash flow management in the future.
In the short run, Econpile’s ability to sustain profits would depend greatly on its ability to quickly secure fresh order books in the next 6 – 12 months. This would serve as a test to Econpile’s ability to remain resilient in tough times like this.
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