Results

• Edgenta reported 2QFY15 displaying revenue of RM794.5m (+6% YoY, +14% QoQ) and core earnings of RM45.8m (-4% YoY, +23% QoQ). This brings 1H core earnings to RM83m, an 8% YoY increase.

• Our derivation of core earnings removes RM21.3m (net of 39% MI) in reversal of deferred consideration from the acquisition of Stewart Weir (Canada) in 2013 which failed to meet its predetermined earnings targets.

Deviation

• 1H earnings made up 36% of our full year forecast. We regard this to be inline as 2H should come in stronger. To illustrate, 2H made up 66% of core earnings last year.

Dividends

• None. Usually declared in 4Q.

Highlights

• Still slow in Australia and Canada. Opus saw 1H revenue and core EBIT decline by 3% and 19% respectively due to the slowdown in Australia (mining) and Canada (O&G). The New Zealand outfit has completed its restructuring exercise and should yield better results ahead while performance in UK and Malaysia remain positive.

• Strong infra performance. PROPEL (infra maintenance) witnessed 34% revenue growth in 1H and PBT expanded by 41%. This was supported by pavement works on the 4th lane widening (completed in July) and Bayan Lepas Expressway. Growth was also supported by the pavement overlay contract for PLUS which begun this year. Potential new maintenance contracts could come from highways such as the SKLIA and East Coast Expressway 2.

• Also better for IFM. The Integrated Facilities Management (IFM) division recorded 4% revenue growth for 1H but a much stronger PBT growth of 22% due to higher variation orders at government hospitals. The hospital maintenance subcontract in Sabah has been further extended by another 6 months starting Oct 2015.

Risks

• Slowdown in consultancy jobs in Australia and Canada.

Forecasts

• No changes as the results were inline. We have already priced in for a weak performance in Australia and Canada.

Rating

• BUY, TP : RM4.21
• The recurring earnings of PROPEL and IFM should provide a steady base while Opus offers growth potential once recovery is seen in Australia and Canada.
• Dividend yield is also decent at 4.6-5% for FY15-16.

Valuation

• While there are no changes to our estimates, we adjust our TP downwards from RM4.76 to RM4.21 as we adjust for a lower net cash (i.e. post final and special dividend payout). This implies FY15-16 P/E of 14.7x and 13.4x, inline with the “mid teen” multiples for companies with stable concessions and large cap contractors.

Source: Hong Leong Investment Bank Research - 1 Sep 2015