Results

• 1HFY16 results for OIC. Opus International Consultants (OIC), a 61.2% subsidiary of Edgenta which is listed on the New Zealand Stock Exchange released its 1HFY16 results yesterday. OIC is the Asset Development and Management Consultancy (ADMC) arm of Edgenta with operations in New Zealand, Australia, UK, Canada and US.

• Barely profitable. While OIC’s 1H revenue declined -7% YoY, core earnings (ex-impairments) fell by a larger magnitude of -88% to NZD0.9m. This was significantly below market consensus forecast of NZD15.7m for the full year FY16. In 1HFY16, OIC made impairments totalling -NZD24m for Opus Stewart Weir (OSW) and its Australian operations.

• Hit in its main market. New Zealand which contributed 59% to OIC’s revenue, suffered lower margins with EBIT levels contracting from 13.2% to 10.7% due to retendered NZTA Network Outcome Contracts.

• Losses continue in Canada and Aus. Losses (EBIT level) in Canada widened 5-folds from -NZD1.2m to -NZD6.5m. This was mainly attributed to the drag from OSW due to (i) sharp reduction in O&G spending and (ii) wildfires in Fort McMurray. Losses in Australia appears to have stabilised YoY (-NZD1.7m vs -NZD2m).

• No boost from the UK. While the UK operations saw topline growth of 5% YoY, EBIT fell by -12%, stemming from higher uncertainty leading up to the Brexit vote.

Comments

• Numbers below expectations. The results announced by OIC were certainly below our expectations as we previously forecasted a recovery in Edgenta’s ADMC division this year.

• Outlook remains challenging. We are concerned that OIC’s main market of New Zealand is experiencing a YoY decline in its orderbook ratio from 53% to 42%. A similar drop is also witnessed in Canada from 52% to 42%.

Risks

• Slowdown in New Zealand and continued losses in Canada and Australia.

Forecasts

• We cut our FY16-18 earnings forecast by 24%, 19% and 13% respectively to reflect the weak outlook experienced by OIC.

Rating

Maintain HOLD, TP: RM3.67

• Whilst we like Edgenta’s cash flow generating capabilities, we feel that there is a lacking of upside catalysts given the drag from its ADMC division (via OIC).

Valuation

• Following our earnings reduction, our SOP based TP is cut from RM3.87 to RM3.67. This implies a rather rich FY16 P/E of 21.1x but a slightly more palatable 17.1x for FY17 should earnings recover.

Source: Hong Leong Investment Bank Research - 17 Aug 2016