Results

• Edgenta reported 3QFY15 displaying revenue of RM734m (- -7% YoY, -8% QoQ) and core earnings of RM70m (+33% YoY, +53% QoQ). This brings 9M core earnings to RM153m, an 18% YoY increase.

• Our derivation of core earnings removes RM21.3m (net of 39% MI) in reversal of deferred consideration (recorded in 2Q) from the acquisition of Stewart Weir (Canada) in 2013 which failed to meet its predetermined earnings targets.

Deviation

• 9M earnings made up 85% of our full year forecast (84% of consensus). At first glance, while this appears to be above expectations, we flag the potential of a weaker 4Q. This is due to (i) staff cost increase from the implementation of its Mutual Separation Scheme (MSS) and (ii) normalisation of margins for PROPEL.

Dividends

• None. Usually declared in 4Q.

Highlights

• Higher efficiency at Opus. Opus (asset consultancy) experienced a 9% revenue decline (9M YoY) due to weak consultancy work in Australia (mining based) and Canada (low oil prices). Despite that, PBT increased 7% resulting due to increased staff efficiency from headcount reduction.

• Margin enhancement for PROPEL. PROPEL (infra maintenance) witnessed 15% revenue increase due to strong recognition of the 4th lane widening in 1H. Revenue tapered -10% QoQ as the job was completed in June. 9M PBT margin expanded from 12.6% to 13.9% as there were more M&E works in 3Q (higher margin job).

• IFM performs well. The Integrated Facilities Management (IFM) division saw 5% revenue growth (9M) along with significant PBT margin expansion from 12.3% to 16.4%. The margin expansion was due to (i) lower level last year as a result of its incinerator breakdown and (ii) higher level of efficiency achieved.

Risks

• Slowdown in consultancy jobs in Australia and Canada.

Forecasts

• No changes as the results were inline.

Rating

• Maintain BUY, TP: RM4.23
• 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. Also, the recent proposed acquisition of KFM Holdings would be mildly EPS enhancing.
• Dividend yield is also decent at 3.2-4% for FY15-16.

Valuation

• While there are no changes to our estimates, we adjust our TP upwards from RM4.14 to RM4.23 as we update our model for the latest balance sheet items. This implies FY15- 16 P/E of 19.2x and 15.5x respectively.

Source: Hong Leong Investment Bank Research - 26 Nov 2015