Results

• Edgenta reported 2QFY17 results with revenue coming in at RM859m (+12% QoQ, +23% YoY) and core earnings of RM27m (+0% QoQ, -19% YoY). This brings cumulative 1H core earnings to RM55m, flattish YoY (+1%).

Deviation

• 1H core earnings made up 34% of our full year forecast (consensus: 40%) which is below expectations even after factoring a traditionally stronger 2H.

• The lower than expected results stemmed from higher than expected depreciation and amortisation, which we reckon came from the acquisitions of KFM and UEMS (full year impact for both).

Dividends

• Interim DPS of 8 sen was declared.

Highlights

• Better performance for Opus. 1H revenue for Opus (consultancy) increased 6% YoY aided by a stronger NZD (vs MYR). Core PBT over the same period rose by a much stronger magnitude of 81% YoY with margin expanding from 3.1% to 5.1%. This improvement is reflective of Opus’ cost rationalisation efforts and better work flow.

• Healthcare boosted by UEMS. The healthcare segment saw the doubling of revenue (+108%) and PBT (+142%) in 1H. This was mainly driven by contributions from UEMS which was acquired in Dec 2016.

• Growth for real estate services. For the 1H period, real estate services experienced YoY growth for revenue of 124% and PBT of 86%. This was driven by the contributions from KFM (acquired in April 2016) and new township management contracts secured.

• Flattish for PROPEL. PROPEL recorded flattish revenue (-4%) and PBT (-3%) YoY for the 1H period. In the absence of significant new contract wins, the results were largely driven by its usual periodic highway maintenance works.

Risks

• Abortion of the proposed acquisition of OIC by WSP.

Forecasts

• We cut FY17-19 earnings by 5-7% after imputing higher depreciation and amortisation for KFM and UEMS.

• Our earnings forecast does not reflect the proposed sale of OIC, pending further clarity on its timeline. As an indication, our FY18 earnings would be cut by 21% upon the disposal.

Rating

Maintain BUY, TP: RM3.52

• We are not perturbed by the lower than expected results as the key play is on the impending disposal of OIC which allows Edgenta to exit its investment at an attractive price, strengthen its balance sheet (to net cash) and focus on its key competencies of facilities and infra management.

Valuation

• With the earnings cut, our SOP based TP is reduced from RM3.34 to RM3.20. This implies FY17-18 P/E of 17.9x and 15.4x respectively.

Source: Hong Leong Investment Bank Research - 23 Aug 2017