Results

• Edgenta reported 1QFY17 revenue of RM769m (-10% QoQ, +18% YoY) and core earnings of RM27m (-36% QoQ, +33% YoY).

Deviation

• 1Q core earnings made up 14% of our full year forecast (consensus: 13.5%) which is below expectations.

Dividends

• None declared. Usually in 4Q.

Highlights

• Opus stronger YoY but weaker QoQ. Revenue for Opus (consultancy) was relatively stable both QoQ (-6%) and YoY (+5%). PBT improved significantly YoY (increasing 4.6x) due to the low base effect in FY16 from the weak operating environment in Canada and Australia. However PBT dropped -50% QoQ (adjusted for EIs in 4Q16) as margins contracted from 8.3% to 4.4%.
• UEMS kicks in. The healthcare segment experienced a surge in PBT by +176% QoQ and +57% YoY due to contribution from UEMS (concluded In Dec 2016) on top of Edgenta’s usual base from the government hospitals.
• KFM contributing well. The real estate services segment (KFM) will see its first full year contribution in FY17 vs 9M in FY16. As such, PBT for 1Q surged 8x YoY (QoQ: -6%).
• PROPEL recovers from a low base. While PROPEL (infra) experienced a -24% YoY decline in revenue, PBT rose +88% due to upward margin normalisation from a low base (5.8% to 14.3%) coupled with reversal of impairments.
• Better times ahead. With Opus undertaking the required impairments in Canada and Australia in FY16, we believe it can now start FY17 on a clean slate. The pipeline of road related jobs also appears promising for PROPEL to secure. FY17 will also mark the first full year contribution for KFM and UEMS.

Risks

• Continued slowdown in Australia and Canada.

Forecasts

• As the results were below expectations, we cut FY17-18 earnings by 13% and 16% respectively. While we continue to expect a recovery in core earnings for FY17, we may have overestimated its magnitude, particularly for Opus and PROPEL.

Rating

Maintain BUY, TP: RM3.52

• After a weak FY16, we believe that an earnings recovery for Edgenta is in place. This will be driven by recovery in its core segments coupled with contributions from acquisitions such as KFM and UEMS.

Valuation

• Our SOP based TP is reduced slightly from RM3.64 to RM3.52 as following the earnings cut which has been partially offset by the switch in valuation methodology of KFM and UEMS from acquisition cost based to DCF (WACC: 10%).

Source: Hong Leong Investment Bank Research - 23 May 2017