We visited the Sultanah Bahiyah Hospital (Alor Setar) and the Operations Central Workshop (Juru) to gain a better insight into Edgenta’s healthcare operations. Having seen intimately the inseparable nature of Edgenta and MOH in its day to day operations, we are more positive on the stability of this relationship. Reiterate BUY with a higher SOP based TP of RM3.24 as we recalibrate our risk metrics assigned to the infra and healthcare division on the back of greater clarity from government’s stance on concessions.

We had the opportunity to visit the Sultanah Bahiyah Hospital (SBH) in Alor Setar (Kedah) and the group’s Operations Central Workshop (OCW) in Juru (Penang); the following are some of the key takeaways.

To recap, Edgenta has a 10 year concession for 32 hospitals in the northern region (ending 2025), as at 9M18 the collective healthcare segment accounted for 46% of revenues and 41% of PBT for the group. The SBH is a 700 bed MOH hospital by design but is operating c.1100 beds as at our visit (highlighting the chronic demand for public healthcare). Edgenta is responsible in aiding the optimization of MOH’s assets and easing the pressures on our public hospitals by virtue of their operations.

Transformations in healthcare. The implementation of cost savings initiatives isn’t solely restricted to the infra division. Transformations within their healthcare concession division are also being simultaneously and progressively implemented. Edgenta’s asset managers shared with us on how sensor technology are utilized to better monitor energy usage from lighting and chillers at the SBH, resulting in savings of c.RM650k in FY17 and RM520k as at July 2018. Further savings are expected to be derived moving forward due to a significant push toward undertaking predictive and preventive maintenance across all facets of operations.

To share is to care. As per the arrangement with PLUS (for its infra division), we can also expect that the cost savings (for the healthcare segment) will be “shared” with the MOH. To offset the additional capex, we can expect Edgenta to leverage this position when the contract renewal cycle commences again. We also understand that the cost savings from operations will be funnelled back into the MOH’s equipment replacement program moving forward. Note that due to budgetary constraints, a lot of the medical equipment at public hospitals nationwide is at the tail end of their useful life.

A friend indeed. The OCW is where Edgenta carries out the technical work for the MOH’s biomedical equipment and houses all the testing equipment and loaner equipment (to supply the MOH when a breakdown occurs). We understand that Edgenta is only required to supply 19 types of equipment to fulfil their contractual obligations. However we observed an array of equipment greater in quantity than as specified by the concession to aid the MOH in her day to day.

Assurance. We have since garnered greater clarity, with the passage of time, from the government on their initial pledge to review concessions. Having seen intimately the inseparable nature of Edgenta and MOH’s in its day to day operations, we are more positive on the stability of this relationship. Furthermore, given the higher budget allocated in 2019 for the MOH, Edgenta is a beneficiary on the potential of higher work orders.

Maintain BUY, TP: RM3.24. We feel that this is an opportune time to recalibrate the risk metrics assigned to the stock. Thus we adjust our WACC from 10% currently to 9%. Valuations remain undemanding for a stable earnings stream, backed by a proven track record and technology driven margin expansion. Reiterate BUY, our SOP based TP is increases to RM3.24 (from RM2.92) providing an upside of 24.1%.

Source: Hong Leong Investment Bank Research - 12 Dec 2018