FY18 core earnings of RM154.5m (+23.5% YoY) were above ours and consensus expectations. The results were above expectations due to (i) the group wide efficiency drive and lower financing costs (ii) improvement from the healthcare division and (iii) a lower effective tax rate. We adjust our FY19-20 forecast upward by 2.6%-3.3% as we account for better margins from the healthcare segment and a lower effective tax rate. Our SOP derived TP increases to RM3.32. The stock remains a good exposure to a stable earnings stream at reasonable valuations trading at FY19-20 PER of 15.8-15.4x with a dividend yield of 4.4%-4.5%. We highlight that the earnings from the infra division has yet to fully reflect the margin accretion of the PBC and we have yet to reflect this in our forecast on account of conservatism. Maintain BUY.

Above expectations. Edgenta reported FY18 results with revenue of RM2,182.6m (+2.9% YoY) and core earnings of RM154.5m (+23.5% YoY). The latter made up 111% of our full year forecast and 121% of consensus. The results were above expectations due to (i) group wide efficiency and lower financing costs (-41% YoY) (ii) improved showing from their healthcare division (Revenue and PBT +8% YoY) and (iii) a lower effective tax rate of c.24% in line with statutory (vs. 28% in FY17).

Dividend. Declared a dividend of 8 sen/share bringing YTD dividends to 14 sen/share (FY17: 13 sen/share - excluding special dividend of 18 sen/share) representing a dividend pay-out of 75%, inline with the groups dividend policy, yielding 4.9%.

Consultancy. FY18 consultancy revenue declined -37% YoY on the back of slower progress for consultancy work for East Malaysia projects. Lower operational leverage resulted in PBT declining by 66% to RM11.2m (from RM33.2m). QoQ PBT slipped to the negative (-RM6.8m) attributable to cost overruns on ongoing projects.

Healthcare. The healthcare division saw FY18 revenue growth (8% YoY, 10% QoQ) on improved contributions from Taiwan and Singapore (via UEMS). PBT improved (8% YoY, 33% QoQ) due to seasonality of work orders from the concession which tends to have lumpy work flows in 4Q. As per the 2019 Budget which saw an increase in healthcare allocation of c.7.9% YoY we continue to expect improved performances from this segment moving forward on more work orders as the government prioritises spending on public healthcare.

Infrastructure. The infra division (PROPEL) experienced revenue growth YoY of 2% is attributed to higher expressway pavement works undertaken whilst PBT was flattish YoY coming in at RM106.3m in FY18 (vs. RM105.8) on the back of marginally higher costs YoY. Recall that the group invested in a “pavement research centre” as part of its greater transformation and drive into Performance Based Contracting (PBC). QoQ revenue (+31%) and PBT (+65%) is reflective of the higher volume of work done on the back of the concessionaire fully utilizing its yearly allocation in 4Q as expected.

Forecast. We adjust our FY19-20 forecast upward by 2.6%-3.3% as we account for better margins from the healthcare segment and a lower effective tax rate of 24% vs. 28% in line with the corporate tax rate, offset by lower contributions from the consultancy segment as we factor in lower PBT margins.

Maintain BUY, TP: RM3.32. Post earnings revision our SOP derived TP increases to RM3.32. The stock remains a good exposure to a stable earnings stream at reasonable valuations trading at FY19-20 PER of 15.8-15.4x with a dividend yield of 4.4%-4.5%. We highlight that the earnings from the infra division is yet to fully reflect the margin accretion of the PBC and we have yet to reflect this in our forecast on account of conservatism.

Source: Hong Leong Investment Bank Research - 26 Feb 2019