Highlights

• Hosts investor briefing. We attended Edgenta’s 2QFY17 investor briefing yesterday which was hosted by its CEO, Dato Azmir Merican, CFO, Muhammad Noor and Head of Corporate Planning, Low Chee Yen. To recap, 1H core earnings of RM55m (+1% YoY) was below expectations.

• Focus on OIC sale. In mid-Aug, Edgenta received a takeover notice from WSP Global (“WSP”), whereby the latter intends to acquire Opus International Consultants (“OIC”), a 61.2% subsidiary of the former. The offer by WSP is at NZD1.85 per OIC share (including NZD0.07 dividend).

• Positive on the disposal. Management views the disposal positively as the offer was at a 87% premium to OIC’s last traded price prior to the announcement. It would also record a gain of RM268m and move its balance sheet position from current net gearing of 28% to net cash. Furthermore, the operating climate for OIC has been challenging outside New Zealand. In 1H17, OIC’s operations in Canada, Australia and UK were all in the red.

• Impact from OIC sale. Management shared that OIC contributed 44-46% of revenue for FY15-16. However, at the core earnings level, its proportion was much lower at 16% for FY15 and 8% for FY16 due to its challenging operating environment faced in those years. Management guided that the earnings gap from OIC can easily be filled by the recent acquisitions of KFM and UEMS. Opus’ operations in Malaysia will continue as usual post OIC disposal. The Malaysian operations is profitable (1H17 EBIT: -3% YoY) and commands the highest orderbook ratio of 78% compared to OIC’s markets of 27-50%.

• Positive dividend surprise. An interim DPS of 8 sen was declared which was a positive surprise as Edgenta usually only pays a final dividend which can still be expected post 4Q results. Management guided that a special dividend can be expected once OIC is sold. Assuming 75% of the disposal proceeds net of debt repayment is returned to shareholders, this translates to a special dividend of RM0.10/share.

Risks

• Abortion of the proposed acquisition of OIC by WSP.

Forecasts

• Unchanged as we have already cut earnings by 5-7% post 2Q results. Our earnings forecast have yet to reflect the sale of OIC. As an indication, our FY18 earnings forecast would be reduced by 21% with the disposal of OIC.

Rating

Maintain BUY, TP: RM3.20

• We are not perturbed by the recent weak 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

• Our SOP based TP of RM3.20 implies FY17-18 P/E of 17.9x and 15.4x.

Source: Hong Leong Investment Bank Research - 24 Aug 2017