News

• Acquisition of AIFS. Edgenta announced that it has entered into an agreement to acquire Asia Integrated Facility Solutions (AIFS) for a purchase consideration of SGD185.9m (RM563.2m) cash. AIFS is currently owned by Dymon Asia Private Equity Ltd (84.6%) and 5 other management shareholders (15.4%). The acquisition will be financed solely via debt and is targeted for completion by end Nov 2016.

• Owner of UEMS. AIFS is an investment holding company which wholly owns UEMS, an entity involved in the provision of integrated facility management (IFM) services primarily for the healthcare sector in Singapore, Taiwan and Malaysia. To a lesser extent, it also provides IFM services for the nonhealthcare commercial sectors.

Comments

• Synergistic acquisition. We view the acquisition to be synergistic to Edgenta’s existing IFM business which remains highly centred on public hospitals in northern Peninsular Malaysia, Sabah and Sarawak. The acquisition of AIFS would allow Edgenta to expand its IFM services to private hospitals which it’s the former’s main clientele base. Aside that, the acquisition would automatically provide Edgenta an exposure to the healthcare sector in Singapore and Taiwan. AIFS (via UEMS) is also a leading provider of housekeeping and portering services in Singapore, an IFM service that Edgenta currently does not offer.

• Paying the healthcare premium. The acquisition price translates to a P/E of 13.6x on FY15 (Dec) earnings of SGD13.6m. However, on a normalised basis, we estimate this to be SGD9.4m, implying a P/E of 19.8x. From a P/B basis, the acquisition translates to a multiple of 6.2x. While these valuation parameters may seem on the high side at the onset, we reckon that it is justified given the premium attached for healthcare related exposure.

Risks

• The acquisition would significantly alter Edgenta’s balance sheet structure from net cash to net debt. On a proforma basis, Edgenta’s net gearing would increase from 1.3% (as of 2QFY16) to 45% due to the debt for funding.

Forecasts

• Our earnings forecast are unchanged pending further guidance by management on the profitability of AIFS.

• Assuming FY15 normalised earnings of AIFS is maintained at SGD9.4m, our FY17-18 earnings forecast for Edgenta would be enhanced by 16% and 13% respectively.

Rating

Maintain HOLD, TP: RM3.67

• While we are positive on the potential earnings accretion from AIFS, we remain cautious on the challenging operating environment for Opus, particularly in Canada and Australia.

Valuation

• Our SOP based TP of RM3.67 implies FY16-17 P/E of 21.1x and 17.1x respectively. This has not taken into account the proposed acquisition of AIFS.

Source: Hong Leong Investment Bank Research - 27 Sep 2016