9M18 core earnings of RM80.5m (+12.6% YoY) were within our expectations and consensus. We can expect a seasonally stronger 4Q beefed up from the concessions as they exhaust their budget allocations. We adjust earnings to account for a more conservative orderbook burn rate from the consultancy segment. The stock remains a fantastic exposure to a stable earnings stream at reasonable valuations trading at FY19-20 PER of 15.2-14.7x with a dividend yield of 4.6%-4.7%. Reiterate BUY, our SOP based TP of RM2.92 provides an upside of 12.3%.

Within expectations. Edgenta reported 9M18 results with revenue of RM1,535.3m (+6% YoY) and core earnings of RM80.5m (+12.6% YoY). The latter made up 58% of our full year forecast and 62% of consensus which is within expectations as 4Q is seasonally stronger, beefed up by the infra division.

Consultancy. 9M18 consultancy revenue declined -14% YoY on the back of slower progress for consultancy work for East Malaysia projects. Nonetheless PBT improved by 32% YoY on better margin composition of ongoing jobs. As per guidance we do expect the consultancy division to tone down in the coming quarters. We reiterate that Edgenta still has RM557m in its consultancy order book which will be executed over the next 5 years.

Healthcare. The healthcare division saw 9M18 revenue growth (5% YoY, 9% QoQ) on improved contributions from Taiwan and Singapore (via UEMS). Nonetheless, PBT declined (-9% YoY, -4% QoQ) due to competitive pricing from the commercial healthcare segment, whilst from the MOH concession the weaker margins are attributed to higher operating costs attributed to breakdowns of biomedical equipment in 3Q18. We note that the recent 2019 Budget saw an increase in healthcare allocation of c.7.9% YoY which should bode well for this division moving forward.

Infrastructure. The infra division (PROPEL) experienced revenue and PBT growth YoY of 8% and 16% in 9M18 attributed to higher expressway pavement works undertaken. QoQ revenue (-5%) and PBT (-26%) declined on less volume of work done. PBT margins eroded (-2.8%) on lower operating leverage. However can expect a stronger showing in 4Q as job flows to ramp up in 4Q as the concessionaire fully utilizes its yearly allocation.

Dividend. No dividends this quarter. Expect a pay-out in Q4 as per the historical norm.

Forecast. We adjust earnings to account for a more conservative orderbook burn rate from the consultancy segment. Our FY18-19 EPS decreases by -4.6%-4.5%.

Maintain BUY, TP: RM2.92. Post earnings adjustment our SOP derived TP decreases to RM2.92 (from 2.97). The stock remains a good exposure to a stable earnings stream at reasonable valuations trading at FY19-20 PER of 15.2-14.7x with a dividend yield of 4.6%-4.7%.

Source: Hong Leong Investment Bank Research - 30 Nov 2018