Results

• Edgenta reported 1QFY15 results with revenue of RM699m (+8% YoY, -23% QoQ) and core earnings of RM37m (+28% YoY, -60% QoQ).

Deviation

• 1Q earnings made up 16% of our full year forecast (17% of consensus). We regard this to be inline as 1Q tends to be the weakest. For example, last year, 1Q only made up 13% of full year core earnings.

Dividends

• None. Usually declared in 4Q.

Highlights

• Australia and Canada slowdown. The Asset Development & Management Consultancy (ADMC) arm undertaken by Opus saw topline decline -3% and -23% YoY and QoQ. This was attributed to weak business conditions in Australia (mining slowdown) and Canada (lower oil prices effecting geotechnical surveys). Its New Zealand outfit remains sound, anchoring division profits. Opus International Consultants (OIC) is currently undertaking a strategic review of its business. Closure of non-profitable businesses outside New Zealand could serve as a revival to overall earnings.

• More work for infra maintenance. The infra maintenance (IM) division by PROPEL saw revenue jump +39% YoY but lower by -27% QoQ. The strong YoY jump was attributed to higher work progress for the North South Expressway 4th lane widening and Bayan Lepas Expressway. We maintain our positive outlook on PROPEL as it is a beneficiary from the rollout of various highways under the 11MP.

• Stable for IFM segment. The Integrated Facilities Management (IFM) segment saw topline increase 6% YoY but declined 16% QoQ (due to fewer variation orders). From 2Q onwards, the IFM division will no longer consolidate results from the East Malaysia hospital concession, which will be equity account at a 40% stake.

Risks

• Slowdown in consultancy jobs in Australia and Canada.

Forecasts

• Despite the challenges faced by Opus in Australia and Canada, the +28% YoY growth in Edgenta’s 1Q earnings is commendable. No changes to forecasts as the results were inline. Our forecasts have already imputed weak Australian and Canadian contributions.

Rating

BUY, TP: RM4.76

• Edgenta offers investors the best of both worlds - a base of recurring earnings for stability (PROPEL and IFM), coupled with the growth potential from Opus during the consultancy cycle upturn.
• Dividend yield is also decent at 3.8-4.2% for FY15-16.

Valuation

• Our TP of RM4.76 is based on the SOP method which implies FY15-17 P/E of 16.6x, 15.1x and 14x, respectively, inline with the “mid-teen” multiples for companies with stable concessions and large cap construction stocks.

Source: Hong Leong Investment Bank Research - 26 May 2015