Results

• Edgenta reported 1QFY16 results with revenue of RM652m (-7% YoY, -27% QoQ) and core earnings of RM20m (-45% YoY, -67% QoQ).

Deviation

• 1Q core earnings only made up 9% of ours and consensus full year forecast which is below expectations.

Dividends

• None declared. Usually in 4Q.

Highlights

• Canada and Australia continues to drag. While Opus (asset consultancy) experienced a 10% YoY revenue growth, PBT margin was exceptionally low at 0.8%. This reflects the continued drag from its operations in Canada (lower O&G activities) and Australia (resource slowdown).

• Lower projects contribution. PROPEL (infra maintenance) witnessed a -12% YoY and -47% QoQ revenue decline along with PBT margins contracting to 5.6% (1QFY15: 14.5%, 4QFY15: 9.6%). This was due to lower contributions from its projects segment (non-recurring) as the 4th lane widening along the North South Highway was completed last year.

• Absence of East M’sia consolidation. The Integrated Facilities Management (IFM) division saw revenue decline by -36% both YoY and QoQ as a result of (i) East M’sia operations becoming an associate from subsidiary and (ii) absence of subcontracting contribution from the earlier mentioned East M’sia associate. PBT margins for IFM expanded slightly to 16.3% (YoY: +40ppts, QoQ: +140ppts) to partially offset the topline drop.

• One off staff expense. Edgenta incurred a one off staff expense amounting to RM14m in relation to a special bonus paid to long serving staff in conjunction with the UEM Group’s 50th Anniversary.

Risks

• Slowdown in consultancy jobs in Australia and Canada.

Forecasts

• We cut FY16-17 earnings by 6% and 3% respectively after imputing the one off staff expense and lower margins for Opus.

Rating

• Maintain BUY, TP: RM4.30

• 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. We continue to like Edgenta for its strong cash flow generating capabilities.

Valuation

• Despite the earnings cut, our TP is only reduced marginally from RM4.32 to RM4.30 as we roll forward our valuation horizon to FY17 and update for certain balance sheet items.

• Our TP implies P/E of 17x and 16.7x for FY16-17 respectively.

Source: Hong Leong Investment Bank Research - 30 May 2016