Highlights

• Host investor briefing. We attended Edgenta’s investor briefing yesterday which was represented by its CEO, Dato Azmir Merican, CFO, Muhammad Noor and Head of Corporate Planning, Low Chee Yen. To recap, FY17 core earnings of RM142m (-3% YoY) were within expectations.
• Healthier balance sheet. Following the disposal of OIC in Dec, Edgenta has received its payment of NZD174m (c.RM494m). The disposal proceeds coupled with its existing cash pile were used to (i) pare down debts amounting to RM447m and (ii) declaration of a special dividend totalling RM125m (15 sen per share). With the disposal completed, Edgenta’s balance sheet has now transformed from net gearing to net cash.
• Post OIC disposal contribution. With the disposal of OIC completed, management guides that its revenue mix should roughly comprise 40% healthcare, 40% infra (PROPEL), 10% real estate services (RES) and 10% consultancy (Opus M’sia). Revenue from healthcare, infra and RES are recurring or relatively stable in nature. Overall, management estimates that revenue from recurring or stable sources should be around 80%. While consultancy is tied to the ebb and flow of construction, we believe that the sector’s upcycle will persist for the next 2-3 years.
• Identified pipelines. Opus M’sia is eyeing on consultancy jobs for the HSR, SKLIA, affordable housing, Johor BRT, KLIA upgrade and Central Spine Road. PROPEL on the other hand hopes to secure pavement works for highways such as SKLIA, SUKE and DASH. For the healthcare division, it is proposing an asset replacement program for government hospitals.
• Forward guidance. Looking forward, management guides for revenue CAGR of 10-15% over the next 5 years (after adjusting for the removal of OIC). It also expects net margin to come in within the range of 8-12% (FY17: 6%). On dividends, while Edgenta’s currently policy is for a payout ratio of up to 70%, this could potentially be raised to 80%.

Risks

• Earnings gap from the disposal of OIC.

Forecasts

• Unchanged as 4Q results were inline. Pending the release of its FY17 audited accounts, our FY18-19 forecasts have yet to reflect the disposal of OIC. As an indication, removing the earnings contribution from OIC will likely reduce our FY18-19 earnings by 18.5% and 17% respectively. Rating Maintain BUY, TP: RM3.23
• The disposal of OIC has strengthened Edgenta’s balance sheet (to net cash) and allows it to focus on its key competencies of facilities and infra management. Earnings should also be more stable with OIC out of the picture.

Valuation

• Maintain SOP based TP of RM3.23.

Source: Hong Leong Investment Bank Research - 27 Feb 2018