Results

• Flattish core earnings. While OIC reported revenue of NZD505m which was down 6% YoY, core earnings remained flattish at NZD21m (-1% YoY). This was due to improved efficiencies resulting in a 7% reduction in operating cost largely driven by headcount cuts (-4%). Overall, core earnings came in 15% above consensus forecast. 

• Exceptional items. During the year, OIC incurred net exceptional items (EI) totalling -NZD4.5m related to the acquisition of Stewart Weir (Canada) in 2013. They were (i) deferred consideration release of NZD8.1m and (ii) goodwill impairment amounting to -NZD12.6m.

Comments

• Numbers appear inline. The flattish core earnings of OIC appear broadly inline with our overall forecast for Edgenta’s ADMC division (including the Malaysia operations). The average NZD-MYR exchange rate for FY15 stood at 2.724 vs our assumption of 2.7 (less than 1% variance).

• Summing it up. The New Zealand outfit (OIC’s main market at 55% of revenue) managed to see 29% EBIT growth despite flattish revenue thanks to its restructuring exercise in early 2015. Operations in the UK saw its best ever performance with a surging orderbook. However, the situation remains challenging in Canada (oil price slump) and Australia (slowdown in resource sector). As a result, headcount in these 2 countries have been cut 10-15%.

Risks

• Prolonged slowdown in Canada and Australia.

Forecasts

• OIC’s net EI of -NZD4.5m is expected to reduce Edgenta’s earnings by RM7.5m (adjusted for 61% stake) or by -4%. However, this does not alter our core earnings forecast.

• 4QFY15 results will be released on 29 Feb.

Rating

• Maintain BUY, TP: RM4.23

• We continue to like Edgenta as it is back by a stable earnings base coming from PROPEL and hospital IFM. Its net cash status puts it in good position to embark on earnings accretive acquisitions.

Valuation

• Our SOP based TP of RM4.23 implies FY15-16 P/E of 19.2x and 15.5x respectively.