Econpile

Can It Be The Next Pintaras Jaya ?

Publish date: Mon, 7 Jul 2014, 10:36 AM 

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1. Introduction

(Can the small tree grow into a big tree ?)

During the past 2 years, Pintaras's share price increased by 200% from RM1.50 to RM4.50.

Now that Econpile has been listed, I am curious whether it can duplicate the performance ?

(Pintaras Jaya share price)

2. Relevant Industry Information

According to the IPO prospectus :-

(a) the piling and foundation services market in Malaysia was valued at an estimated RM2.96 billion in 2013 and is expected to grow at a compounded annual growth rate of 9.1% for the year 2013 to 2018.

(b) the construction industry in Malaysia is worth approximately RM29.4 billion in 2013.

(Based on the above figures, it seemed that piling / foundation work constitues approximately 10% of the value of construction industry)

(c) the piling industry is expected to grow further from RM2.96 billion in 2013 to RM4.58 billion in 2018.

(d) As at March 2014, there are 5,893 piling companies registered with CIDB under the civil engineering category, of which 2,208 are G7 piling contractors (note : G7 are established players allowed to bid for unlimited contract size). 

(e) meanwhile, there are 944 piling companies registered with CIDB under the building construction category, of which 346 are G7 piling contractors. 

(f) established industry players are as follows :-

Revenue	(RM mil)
Econpile	386
Sunway Geotechnics	380
Pintaras Jaya	173
Geopancar Sdn Bhd	155
Geohan Sdn Bhd	142
Aneka Jaringan Sdn Bhd	127
Ansah Sdn Bhd	64
Chuan Luck Piling SB	45
TOTAL	1,472

The above 8 companies accounted for 50% market share.

Econpile's market share is 13%.

3. Pintaras Jaya vs Econpile

The tables below set out the historical financial information of Pintaras Jaya and Econpile respectively :-

(Pintaras Jaya)				9 months
				ended
FYE 30 June (RM mil)	2011	2012	2013	Mar 2014
Revenue	125.9	185.2	172.8	140.2
EBITDA	33.7	73.9	67.0	55.0
Depreciation	(7.6)	(10.8)	(11.4)	(9.4)
int income / (exp)	1.6	1.8	3.0	2.3
gain on disposal/others ^	12.0	(7.0)	8.6	(2.2)
PBT	39.7	57.9	67.2	45.7
tax	(7.2)	(13.0)	(14.8)	(12.2)
PAT	32.5	44.9	52.3	33.5
EBITDA margin (%)	26.7	39.9	38.8	39.2
tax rate (%)	18.2	22.5	22.1	26.7
depreciation/turnover (%)	6.0	5.8	6.6	6.7
net assets	219.8	237.5	271.0	301.0
ROE (%)	14.8	18.9	19.3	14.8

^ related to its investment securities

(Econpile)				9 months
				ended
FYE 30 June (RM mil)	2011	2012	2013	Mar 2014
Revenue	207.6	305.8	386.1	318.9
EBITDA	26.4	33.0	51.5	45.9
Depreciation	(10.1)	(10.1)	(12.6)	(10.7)
int income / (exp)	(0.6)	(0.8)	(1.1)	(0.8)
gain on disposal/others	0.0	1.8	0.8	1.1
PBT	15.7	23.9	38.6	35.5
tax	(4.4)	(6.6)	(10.7)	(10.9)
PAT	11.3	17.3	27.9	24.6
EBITDA margin (%)	12.7	10.8	13.3	14.4
tax rate (%)	28.0	27.6	27.7	30.7
depreciation/turnover (%)	4.9	3.3	3.3	3.4
net assets	n/a	n/a	88.7	113.0
ROE (%)	n/a	n/a	31.4	29.0

Some key observations arising from the above analysis :-

(a) Pintaras Jaya Has Higher EBITDA Margin

Pintaras Jaya's EBITDA margin of closed to 40% is approximately 200% higher than that of Econpile's approximately 12%.

Further analysis will be carried out in Section 4 below to try to ascertain the reasons for such huge differences in EBITDA margin.

(b) High Profitability Not Necessarily Due To Low Depreciation Charges

In an interview with The Star dated 31 May 2014, the MD of Pintaras Jaya attributes the group's high profit margin to "expertise, track record and reputation as well as its machineries, which has been fully depreciated ".

However, the analysis above told a different story. Econpile has lower net profit margin. However, its depreciation charges also very low. This seemed to be the norm in the industry. Pintaras Jaya's depreciation figures are not the main contributing factor to its strong profitability.

(c) Pintaras Jaya's Return On Equity Understated

At first look, Econpile has higher ROE (30% vs Pintaras Jaya's 14.8%). This is counter intuitive. Pintaras Jaya has higher EBITDA and net margin, why does it have lower ROE ?

The main reason is because Pintaras Jaya has high cash holding (RM109 mil cash and RM50 mil investment securities). Stripping out those items (via a distribution back to shareholders), net assets will drop from RM301 mil to RM142 mil. ROE will increase from 14.8% to 32%, in line with that of Econpile.

4. Cost Structure Might Provide Explanation For Margin Differential

The following information are extracted from Pintaras Jaya's annual reports and Econpile's IPO prospectus :-

(Pintaras Jaya)
FYE 30 June (RM mil)	2011	2012	2013
subcontractor cost	12.6	25.6	11.1
construction material	48.7	64.9	60.1
depreciation	7.6	10.8	11.4
staff costs	12.3	13.6	14.2
others	21.6	33.9	24.3
Total	102.8	148.8	121.1

(Econpile)
FYE 30 June (RM mil)	2011	2012	2013
subcontractor cost	74.4	139.9	170.6
construction material	72.8	85.8	96.4
depreciation	8.8	8.9	11.4
staff cost	9.8	12.3	14.3
others	16.7	24.2	35.9
Total	182.5	271.1	328.6

      

When comparison is made between the two tables, one thing immediately stands up like a sore thumb - compared to Pintaras Jaya, Econpile spent huge amount on "Subcontractor Cost".

For example, for FY2013, payment made by Econpile to Subcontractors amounted to RM171 mil, vs Pintaras Jaya's RM11.1 mil.

Econpile provides the following explanation in its IPO prospectus :-

"We engage our subcontractors for various labour intensive works in our piling and foundation services projects such as constructing diaphragm walls and basement. By doing so, we will be able to focus on our competitive strengths in bored piling and other important activities in top-down construction"   

SUBJECT TO FURTHER INFORMATION, IT SEEMED THAT ECONPILE'S PRACTICE OF FARMING OUT WORK TO SUBCONTRACTORS MIGHT HAVE RESULTED IN EARNINGS LEAKAGE.

THIS COULD BE ONE OF THE REASONS WHY PINTARAS JAYA'S PROFIT MARGIN IS SO MUCH MORE SUPERIOR THAN ECONPILE.

5. Concluding Remarks

(a) Turnover wise, Econpile is almost twice as huge as Pintaras Jaya. However, I would say that as far as market position is concerned, there is no evidence / indication that one party is in stronger position than the other (both have the requisite skills, track record and balance sheet strength to compete for contracts).

(b) No doubt Pintaras Jaya has higher EBITDA margin than Econpile. However, Econpile has higher turnover. The two groups might have been operating under different philosophy, one focus on turnover while the other focuses on profit margin. However, at the end of the day, both did a great job in creating value for their shareholders, as demonstrated by their equally high ROE.

(c) it is not clear why Econpile chose to farm out works to subcontractors instead of doing them themselves. One possible reason is that they were being financially conservative. By not investing excessively in machineries and workforce during boom time, they would be in better position to weather a downturn. Of course, what was mentioned above was purely my speculation. This point can only be confirmed if we have a chance to speak to the management or major shareholders of Econpile.

(d) Based on 9 months figures annualised, Pintaras Jaya is currently trading at 15.6 times prospective earning. Econpile on the other hand, is trading at prospective PER of 12.7 times.       

(RM mil)	Pintaras	Econpile
Market cap	697	417
Prospective earnings	44.7	32.8
PER (times)	15.6	12.7

Due to Pintaras Jaya's cash holding of closed to RM150 mil (and hence better dividend payment capacity),  I would argue that Pintaras Jaya deserves to trade at a (slight) premium to Econpile.

(e) As it turns out, the title of this article "Can It Be The Next Pintaras Jaya ?" is an invalid question. Econpile is not going to "become the next Pintaras Jaya". From market position and operation point of view, Econpile is already as established as Pintaras Jaya. Valuation wise, Econpile is already trading at almost similar level as Pintaras Jaya.

Looking back at the past two years, Pintaras Jaya's 200% rise in share price was principally driven by PE multiple expansion instead of earnings growth (net profit grew from RM45 mil in FY2012 to RM52 mil in FY2013, an increase of RM8 mil, or 16% only).

In my opinion, if you are hoping that Econpile will deliver 200% capital gain over the next two years through price discovery, it is unlikely to happen.

Having said so, we can't rule out further upside for Econpile (or Pintaras Jaya). According to Independent Market Research as set out in Econpile's IPO prospectus, the piling industry has at least few more years of growth ahead. Positive news flow could potentially propel share price to higher level going forward.