Results

• Edgenta reported 2QFY16 with revenue of RM698m (-12% YoY, +7% QoQ) and core earnings of RM60m (+32% YoY, +194% QoQ). This brought cumulative 1H core earnings to RM81m, somewhat flattish YoY (-3%).

• Headline numbers depicted a loss of -RM8m in 2Q and reported profits of RM12m in 1H. However, in deriving core earnings, we strip off RM68m worth of impairments involving Opus Stewart Weir (OSW), Australia operations and a Canadian JV.

Deviation

• 1H core earnings made up 56% of our full year estimate which we deem inline, taking into account further uncertainties in 2H for Opus. The results were however, below consensus at 42% of full year forecast.

Dividends

• None declared. Usually in 4Q.

Highlights

• Still draggy in Canada and Aus. While Opus (asset consultancy) saw flattish 1H revenue (-3% YoY), core PBT dropped -42% due to margin contraction from 5.1% to 3.1% given the continued drag in Canada (low O&G spending) and Australia (resource slowdown). Encouragingly however, is the recovery in PBT margins QoQ from 0.8% to 5.3%.

• Timing gap for PROPEL. PROPEL (infra maintenance) saw 1H revenue declining by -13% YoY due to the timing gap between completion of older jobs (NSE 4th lane widening) and the commencement of newer ones. PBT margin also contracted from 13.2% to 11.1% owing to this.

• Stable IFM also hit. 1H revenue for Integrated Facilities Management (IFM) fell -26% YoY due to the loss of contribution from East Malaysia (now an associate). Negatively surprising was the low PBT margin of 5.8% in 2Q (2QFY15: 14.3% and 1QFY16: 16.3%). This was due to higher maintenance charges for it bio medical equipment.

Risks

• Continued slowdown in Australia and Canada.

Forecasts

• We had already cut our FY16-18 earnings forecast 2 weeks ago by 24%, 19% and 13% respectively following the weak results by OIC (61.2% subsidiary listed on the NZX). As such, there are no further changes to our estimates in this report.

Rating

Maintain HOLD, TP: RM3.67

• While we like Edgenta’s cash flow generating capabilities, we feel there is a lacking of upside catalysts given the drag from its ADMC division, mainly due to OIC.

Valuation

• Our SOP based TP of RM3.67 is based on the SOP method which implies a rather rich P/E of 21.1x for FY16 but a more acceptable level of 17.1x for FY17 once its earnings recover.

Source: Hong Leong Investment Bank Research - 30 Aug 2016