Highlights

• Management meet up. We recently met up with Edgenta’s CFO, Dato Jezilee Mohd Ramli for an update. Overall, we gather that results for 2H15 could prove challenging due to (i) weak performance of Opus in Canada and Australia; (ii) completion of the NSE 4th lane widening in July; and (iii) staff cost increase from its Mutual Separation Scheme (MSS).

• Tough times in Canada and Aus… While 1H revenue for Opus was flat YoY (-3%), PBT was down by -19% due to widened losses in Canada and Australia. The level of survey work declined in Canada due to lower oil prices (Figure #1). Performance in Australia was in turn, hit by the general economic slowdown, particularly in the resource sector. To tackle this, workforce in Australia has been cut by 19%.

• …but supported in NZ. The New Zealand outfit held up well with 1H EBIT rising 34% YoY despite flattish revenue. This was a result of a restructuring exercise in early 2015 which better positioned the business whilst reducing headcount by 7%. Opus will continue to tender for more Network Outcome Contracts from the NZ Transport Agency (3 contracts in 2015 and 4 in 2016). It has thus far been successful in securing 7 (out of 10) of such contracts.

• Malaysia’s construction upcycle . Contribution by PROPEL is expected to taper off in 2H due to the completion of the NSE 4th lane widening in July. Nonetheless, job replenishment prospects appear robust with Malaysia’s construction upcycle. Being the largest player for road pavements, it is eyeing on highways such as the Pan Borneo Highway, West Coast Expressway, DASH, SUKE and SKLIA. Apart from that, it is also looking to undertake utility relocation works for the MRT2 and LRT3.

• MSS cost to hit. Edgenta recently embarked on a MSS to streamline its workforce following its merger last year. This one off MSS cost is expected to be incurred in 4Q. Management expects the exercise to “breakeven” in 2 years.

Risks

• Slowdown in consultancy jobs in Australia and Canada.

Forecasts

• After taking into account the weak operations in Australia and Canada as well as the MSS cost, we cut FY15-17 earnings by 23%, 13% and 12% respectively.

Rating

• Maintain BUY, TP: RM4.14
• We continue to like Edgenta for its stable earnings base from PROPEL and hospital concessions while Opus provides growth prospects once recovery is seen in Australia and Canada.
• Dividend yield is also decent at 3.3-4.1% for FY15-16.

Valuation

• Our SOP based TP is only reduced slightly from RM4.21 to RM4.14 as it is very much supported by a longer term DCF valuation. This implies FY15 P/E of 18.8x but a more palatable 15.2x in FY16 once earnings recover.

Source: Hong Leong Investment Bank Research - 15 Oct 2015