1QFY18 earnings of RM30m (-41% QoQ, +8% YoY) were within our expectations and consensus. All key divisions (healthcare, infra and consultancy) recorded higher PBT YoY. New administration change post GE14 poses some uncertainty with regards to consultancy job flows and toll abolishment. However, we take some comfort as Edgenta is 69% owned by Khazanah. Maintain BUY with slightly lower SOP based TP of RM2.97 from RM3.23. FY18-19 yield is attractive at 5.8% and 6.2%.

Within expectations. Edgenta reported 1QFY18 results with revenue of RM460.8m (- 31% QoQ, +10% YoY) and core earnings of RM29.6m (-41% QoQ, +8% YoY). The latter made up 21% of our full year forecast (post OIC disposal) and 22% of consensus which is within expectations as 2H is traditionally stronger. Note that 1Q is the first full quarter post OIC disposal which was concluded in mid-Dec 2017.

Strong recovery for consultancy. While 1Q consultancy revenue was up 13% YoY, PBT jumped 3-folds due to the low base effect last year resulting from provision of doubtful debts. The review of mega projects by the new administration could impact potential consultancy job flows to Edgenta (via Opus). Nonetheless, Edgenta still has RM557m in its consultancy orderbook which will be executed over the next 5 years.

Steady growth for healthcare. The healthcare division saw 1Q revenue and PBT grow by 5% and 8% YoY respectively as new contracts secured in Taiwan and Singapore (via UEMS) contributed.

Infra performs well too. The infra division (PROPEL) experienced revenue and PBT growth YoY by 15% and 11% mainly from higher expressway pavement works undertaken during the quarter. Operationally, PROPEL is transforming from its current input (i.e. resource) based model to and outcome based for the road maintenance industry which is expected to enhance cost efficiency. The key uncertainty for PROPEL is the proposed toll abolishment by the new administration. Currently, the bulk of PROPEL’s earnings are derived from the North South Expressway (by concessionaire PLUS). However, it is tough to draw any inferences at this juncture until more light is shed on the toll abolishment proposal.

Revised dividend policy. Earlier this month, Edgenta made a slight revision to its dividend policy from “up to 70% of PATMI” to “50% to 80% of PATMI”. Our payout ratio assumption of 70% is within the newly revised range. At current share price, this translates to an attractive yield of 5.8% and 6.2% for FY18-19.

Forecast. Unchanged as the results were inline.

Maintain BUY, TP: RM2.97. While there are no changes to earnings, we take this opportunity to revise some valuation parameters which lowers our TP from RM3.23 to RM2.97. Namely (i) lowering consultancy P/E target from 14x to 10x and (ii) increasing WACC for PROPEL from 8% to 10%. These changes reflect the increased uncertainty with regards to job flows and the toll abolishment proposal. Nonetheless, in the bigger scheme of things, we do not reckon there will be a significant detrimental impact to Edgenta as it is majority owned by Khazanah (69%), which in turn, is owned by the government of the day.

Source: Hong Leong Investment Bank Research - 24 May 2018