Edgenta will concentrate on increasing its order-book to lift 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 with FY19-20 dividend yield of 3.8%-4.0%. Maintain BUY and SOP derived TP of RM3.58.

We Attended Edgenta’s Briefing Yesterday With the Following Key Takeaways:

Recap. Edgenta reported 1HFY19 results with revenue of RM1,111.3m (+10.4% YoY) that brought core earnings to RM68.4m (+8.1% YoY). We deem the results in line with expectations as Edgenta has historically had a stronger 2H. The lift YoY was mainly due to better healthcare contribution (+19.7%) and lower financing costs (-7.5% YoY).

Healthcare Support. This division continues to be the highest revenue contributor to the group at 51% (+4.5% YoY) also with strong prospects on the back of growth in number of hospitals, amid ageing population and increasing life expectancy trends. In Commercial business, Edgenta is confident on securing more business from Singapore (ongoing re-clustering of hospitals exercise) and Taiwan. Edgenta will continue to focus on optimising the margins of newly secured contracts through operational excellence and technology. Edgenta has succeeded in implementing RFID technology for linen tagging (in 3 hospitals) (4QFY18) and has taken over the housekeeping services at the 1,000 bed Changi General Hospital Singapore.

Property & Facility Solutions. The JV agreement with Township Management Services Sdn Bhd (TMS) on township management services in Medini and Nusajaya has been terminated as at 3rd Sept. The region did not ramp up as fast as Edgenta expected, and with the minimal impact to earnings (1% contribution to FY18 total revenue), Edgenta has been gradually paring down the operations since end of last year. Edgenta will not be affected with the termination of the agreement.

Consultancy. Opus remains focused on delivering its services for the newly-secured 900m-1km Sarawak Coastal Road Network and Second Trunk Roads project while continuing to work on the Pan Borneo Highway Sabah packages.

Infrastructure Services. Concentration is on securing new contracts with efficiency elements (automated/ mechanised solutions) in the expressway maintenance business. It has recently launched mechanised vehicles and had MoU signing with Malaysia Highway Authority and CIDB Malaysia (June 2019). Also, it is leveraging on its presence in Indonesia with the maintenance of the 115km Cipali Highway.

North South Expressway Concession. News flow regarding takeover of PLUS highway from the Government remains in the early stages. Edgenta is confident that is has competitive advantage of keeping the concession irrespective of the asset owner due to their technological advancement and long track record (almost 30 years) of maintaining the longest and one of the oldest highways in Malaysia.

Outlook. Focus is on growing its order-book to boost topline whilst ramping up its technology cost efficiency drive to maintain margins. We expect organic revenue growth to follow through in FY19. Edgenta has RM13.2bn of work in hand (at 1H19).

Forecast. Unchanged.

Maintain BUY, TP: RM3.58. Maintain our BUY call and TP of RM3.58. The stock remains a good exposure to a stable earnings stream with FY19-20 dividend yield of 3.8%-4.0% to match. We like Edgenta for its defensive earnings profile and pivot towards healthcare support services regionally. We expect more news flow from regional healthcare support services jobs in 2HFY19.

Source: Hong Leong Investment Bank Research - 5 Sept 2019