Highlights

• Hosts analyst briefing. We attended Edgenta’s analyst briefing which was hosted by its CEO, Azmir Merican, COO Ir Wan Azman, CFO, Dato Jezilee Mohd Ramli and MD of Opus International Consultants (61% subsidiary), Dr David Prentice. To recap, FY15 core earnings of RM214m (+3% YoY) were above expectations.

Positives

• in NZ, UK and M’sia. In New Zealand (49% of Opus revenue), the outlook remains positive with opportunities in transport and network management as well as rural water supply. The UK saw its best performance yet with orderbook percentage growing from 55% to 67%. Orderbook percentage also remains high in Malaysia at 67% where it is pursuing contracts for the East Coast Highway 2 and Pan Borneo Highway (Sabah).

• Cautious in Canada and Aus. The outlook in Canada remains challenging following the oil price plunge leading to curtailed investments as well as environmental concerns on pipeline expansion. Work level for Opus Stewart Weir has been declining for the past 2 years and headcount has been swiftly cut to match this. While the Australian outlook continues to be hampered by the mining slowdown, management feels that the worse could possibly be over with orderbook percentage recovering from 25% to 33%.

• PROPEL-ing higher. Despite completion of the North South Expressway (NSE) 4th lane widening, management is eyeing on continued growth. This will be driven by (i) pavement structural overlay for the NSE, (ii) recently awarded state road maintenance for Selangor (RM109m), (iii) upcoming major highways (WCE, DUKE, DASH, SUKE and SKLIA) and (iv) utilities relocation works for the MRT2 and LRT3.

• East M’sia decline. The Integrated Facilities Management (IFM) division should witness a decline this year as the subcontract from its associates in Sarawak ended in Dec while Sabah will cease in March. This has already been preempted by management and captured in our forecast.

Risks

• Slowdown in consultancy jobs in Australia and Canada.

Forecasts

• No change to forecast as most of the key briefing takeaways did not yield any major surprises.

Rating

• Maintain BUY, TP: RM4.32
• 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. Its strong net cash positon (RM0.52/share) places Edgenta in a polar position to embark on earnings enhancing acquisitions.
• Dividend yield is also decent at 4.8-5.3% for FY16-17 based on a 60% payout ratio (dividend policy is up to 70%).

Valuation

• Our SOP based TP of RM4.32 implies FY16-17 P/E of 15.9x and 14.4x respectively, inline with the “mid-teen” multiples for stable concessions and large cap contractors.

Source: Hong Leong Investment Bank Research - 3 Mar 2016