Results

• Recovery in 2H. Despite barely breaking even in 1H, Opus International Consultants (OIC), a 61.2% subsidiary of Edgenta, managed to end FY16 with core earnings of NZD7.7m (-64% YoY). This follows from a recovery in 2H driven by cost cutting measures (reduced headcount) and improved efficiency. Against consensus, OIC?s results fell short by -9%. Excluded in the derivation of core earnings is a NZD37.6m impairment for Opus Stewart Weir (OSW) and its Australian operations.
• Rebound in its main market. New Zealand remains OIC?s largest contributor at 59% of revenue. Although 1H EBIT was weak, this rebounded strongly by +48% in 2H, bringing full year numbers to be flat YoY. OIC managed to secure another Network Outcome Contract, bringing the total contracts to 10 out of 19. It sees potential from rebuilding efforts following the recent Kaikoura earthquake tragedy in Nov 2016.
• OSW profitable in 2H. While Canada and US were loss making for the full year (EBIT: -NZD7.3m), there are improving signs with OSW recovering from a -NZD5.1m trading loss in 1H to a profitable 2H of NZD2m (ex. restructuring cost and lease provisions).
• Wider losses in Aus. The losses in Australia widened from EBIT of -NZD2.6m to -NZD4.7m. This was due to losses on a NSW Pacific Highway project, lease provisions and restructuring costs following the closure of 5 offices.
• GBP impact from Brexit. UK remained profitable in FY16 with EBIT of NZD2.2m (-17% YoY). While revenue in local currency increased +8% YoY, it fell -3% in NZD terms due to a weaker GBP following Brexit.

Comments

• Numbers within expectations. OIC?s results appear to be within our expectations as we have already priced in a 2H recovery in our forecast for Edgenta.
• Cautiously positive. While we are positive on OIC?s 2H recovery, we would place a close watch on its orderbook ratio which has shown a decline across all markets.

Risks

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

Forecasts

• Unchanged as we have already factored a 2H recovery for OIC. Rating Maintain BUY, TP: RM3.85
• We are cautiously optimistic on the recovery signs shown by OIC. That aside, the recent acquisition of UEMS by Edgenta should present the latter with a new earnings stream in FY17.

Valuation

• Our SOP based TP of RM3.85 is unchanged which implies FY17-18 P/E of 16.4x and 14.5x respectively.

Source: Hong Leong Investment Bank Research - 03 Feb 2017