Highlights

• Meeting with management. We met up with Edgenta’s management last week which was represented by its CEO, Dato Azmir Merican, CFO, Muhammad Noor and Head of Corporate Planning, Low Chee Yen.
• Recap on proposed OIC disposal. In mid-Aug, Edgenta received a takeover notice from WSP Global (“WSP”), whereby the latter intends to acquire OIC, a 61.2% subsidiary of the former. The offer by WSP is at NZD1.92 per OIC share (including NZD0.14 dividend) and would yield Edgenta with cash proceeds of RM504m.
• Timeline on track. Edgenta has received shareholder’s approval on 2 Nov for the disposal of OIC. The proposed disposal is now pending approval from New Zealand’s Overseas Investment Office which regulates foreign investments into the country. Overall, management guides that the disposal is on track to be completed by year end.
• A positive move. We are positive on Edgenta’s move to sell OIC as the offer price was at a significant premium of 93.9% to the latter’s last share price close of NZD0.99 prior to the announcement. The disposal would also allow Edgenta to monetise its investment in OIC with a potential gain of c.RM260m (before any dividend by OIC). Also, Edgenta’s balance sheet would transform from its current net gearing of 28% (2QFY17) to a net cash positon of RM118m (RM0.14/share) on a proforma basis.
• Structure post disposal. The sale of OIC allows Edgenta to focus on facilities and infra management in which it has direct control. As for its Opus’ Malaysia operations, this will continue as usual as it is not part of OIC. Management guides that post disposal, its revenue breakdown will likely comprise of 40% healthcare, 40% infra, 10% property and 10% consultancy.
• Special dividend? After accounting for debt repayment (RM415m) from the disposal proceeds, we estimate that Edgenta will have RM85m which could potentially be returned via a special dividend (RM0.08/share).

Risks

• Abortion of the proposed acquisition of OIC by WSP.

Forecasts

• Pending the release of 3QFY17 results (24 Nov), our earnings forecast have yet to reflect the sale of OIC. As an indication, our FY18 earnings forecast would be reduced by 15.5% with the disposal of OIC.

Rating

Maintain BUY, TP: RM3.20

• We are positive on the disposal of OIC as it 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 - 14 Nov 2017