We headed to Singapore to meet UEMS. The objective was to witness how principles of automation and IOT are married into physical asset management at public hospitals and to qualitatively gauge the productivity gains from the reallocation of labour and time for porters and nurses. This is essential as it gave us grounding in understanding the transition that Edgenta is pushing for at MOH (Malaysia) for the 32 hospitals up north. Maintain our BUY call and SOP derived TP of RM3.58.

UEMS. We headed down south to meet up with UEMS - Edgenta’s driver of their healthcare support services business in Singapore (>25 public and private hospitals), Malaysia (>20 private hospitals) and Taiwan (>60 public and private hospitals). We were hosted by UEMS’s CEO Ms. Low Chee Yen and team who took us to two operational sites (i) KK Women’s and Children’s Hospital and (ii) Changi General Hospital.

Healthcare division. To recap, the healthcare support division accounts for c.45% of the Edgenta’s revenue and PAT as at FY18. Thanks to stronger contributions from Taiwan and Singapore (via UEMS), the commercial healthcare segment has now surpassed the concession segment in both revenue and PAT terms. This should perhaps help dispel the myth that Edgenta is highly reliant on the Malaysian concession segment in reminiscence of the old Faber days.

Objective. The objective of the visit was to witness how principles of automation and IOT are married into physical asset management at public hospitals across the causeway and to qualitatively gauge the productivity gains from the reallocation of labour and time for porters and nurses. This is essential as it gave us grounding in understanding the transition that Edgenta is pushing for at MOH (Malaysia) for the 32 hospitals in North Malaysia.

The Tech. We visited the KK Women’s and Children’s (KKWACH), a 830 bed maternity and paediatric public hospital located in Bukit Timah and Changi General Hospital (CGH), a 1000 bed public hospital serving a community of 1.4 million people in eastern Singapore. CGH implements assistive robotics to improve operational efficiency of the hospital. CGH is the first hospital outside of Japan to utilise HOSPI (Panasonic autonomous delivery robots – refer to figure #1). Integrated as part of the hospital's porter management system, HOSPI is able to deliver medicines, medical specimens and case notes 24/7, reducing manpower hours. We also witnessed the usage of AGV’s (autonomous guided vehicles – refer to figure #2) to trolley amongst other things, meals to wards – going up and down the elevator systems without human assistance.

Up in the clouds. We saw the usage of UETRACK - a proprietary cloud based mobile resource optimization app – essentially a work order management system for healthcare services (see figure # 3) at KKWACH. UETRACK allows for real time management and deployment of resources within the hospital across various segments of facilities operations. UETrack centralizes the supervisory role across all facets of facility management/operations with a single point of control for service level at the fingertips of one executive.

Outlook. We are confident that Edgenta will be able to institutionalize best practices between UEMS and Edgenta Mediserve (in Malaysia). By leveraging on the technical expertise at UEMS, we can expect this to translate into productivity gains at Edgenta Mediserve. We understand that the transition to performance based contracts at the MOH is a gradual and ongoing process. The apple takes some time to transition from seed to fruit, but the seed is planted and the sun is shining brighter than ever.

Beneficiary of toll nationalization. On a side note, we are of the opinion that Edgenta would be in good standing to bid and potentially secure more O&M jobs in light of the recent 4 toll acquisition exercise by the PH government. The 4 tolls measures 110.7km (PROPEL currently provides O&M services to >2500km of roads in Malaysia and Indonesia). Edgenta via PROPEL has all the necessary prerequisites (expertise, scale, history and relationship) to secure the job via open tender, post deal completion end 2019. We believe Edgenta will be leveraging their pavement research centre to drive the cost down to entice the government.

Forecast. Unchanged.

Maintain BUY, TP: RM3.58. Maintain our SOP derived TP of RM3.58. The stock remains a good exposure to a stable earnings stream at reasonable valuations trading at FY19-20 PER of 14.7-14.0x with a dividend yield of 4.8%-5.0%. We expect revenue growth from the healthcare support segment to be driven by UEMS as it vies for a larger share of the healthcare support services pie regionally, whilst margin expansion will be driven by gradual transition to performance based contracts with MOH Malaysia.

Source: Hong Leong Investment Bank Research - 27 Jun 2019