Edgenta will focus on growing its order-book to boost topline whilst simultaneously ramping up its technology driven cost efficiency drive to maintain margins. The stock remains a good exposure to a stable earnings stream at reasonable valuations trading at FY19-20 PER of 16.1x-15.7x with a dividend yield of 4.3%-4.5%. We highlight that the earnings from the infra division is yet to fully reflect the margin accretion of the PBC. Maintain BUY and SOP derived TP of RM3.32.

We attended Edgenta’s FY18 briefing yesterday, the following are some of the key takeaways.

Recap. Edgenta reported FY18 results with revenue of RM2,182.6m (+2.9% YoY) translating into core earnings of RM154.5m (+23.5% YoY) which was above expectations. The stellar results were 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 23% (vs. 28% in FY17).

Infrastructure. Margins in FY18 from their infra division has yet to reflect the cost savings and margin enhancing elements of the performance based contracting (PBC). Their investment in the “pavement research centre” is expected to save c.RM20m p.a. moving forward vis-a-vis existing materials utilized based on input based contract. In FY19, the group will fully transition to the PBC model for PROPEL in stages.

Healthcare. On the UEMS side, management will ramp up its presence in Singapore and aims at chipping away market share from a dominant player in the space. We can expect some margin dilution from the commercial segment as the group builds its orderbook in Singapore. On the domestic front, 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.

Consultancy. Opus had a disrupted FY18 on the back of GE14, which saw major infra projects being halted. However, we take solace in the fact that the PM recently mentioned that project reviews are over and to forge ahead with existing jobs. Whilst we do expect the Pan Borneo Sabah to continue, this will be at the expense of the PDP model. To mitigate this and grow its presence in Borneo, Edgenta is eyeing the Sarawak coastal roads contract (project management role). The estimated project management contract value is estimated to be c.1.5%-1.8% of the total work package (c.RM10bn) to be undertaken in phases over a 10 year period.

FY19 Outlook. Edgenta will focus on growing its order-book to boost topline whilst simultaneously ramping up its technology driven cost efficiency drive to maintain margins. Edgenta has a solid track record in winning jobs-big and small- across all segments (c. +RM517m in FY18); we can expect this organic revenue growth to follow through in FY19. As at Dec 2018 Edgenta has RM13.4bn of work in hand outstanding.

Forecast. Unchanged.

Maintain BUY, TP: RM3.32. Maintain BUY and our SOP derived TP of RM3.32. The stock remains a good exposure to a stable earnings stream at reasonable valuations trading at FY19-20 PER of 16.1x-15.7x with a dividend yield of 4.3%-4.5%. We highlight that the earnings from the infra division has yet to reflect the margin accretion of the PBC which will come in full force- albeit in stages in FY19.

Source: Hong Leong Investment Bank Research - 6 Mar 2019