Edgenta’s focus in FY20 would be to concentrate on lifting its top line at the same time ramping up its technology driven cost efficiency to improve margins. The stock remains a good exposure to a stable earnings stream with FY20-21 dividend yield of 6.0%-6.2%. We maintain our forecasts as the briefing yielded no surprises. We maintain BUY with unchanged SOP derived TP of RM3.56.

We Attended Edgenta’s Briefing Yesterday and the Following Are Some Key Takeaways:

Recap. Edgenta reported FY19 results with revenue of RM2,411.2m (+10.5% YoY) that brought core earnings to RM158.7m (+2.7% YoY). The results were a tad above expectations due to higher revenue thanks to the turnaround of Opus. The boost was mainly due to better consultancy (+25.1%) and infrastructure contribution (+30.3%).

Healthcare support. Consistently healthcare support has been the highest revenue contributor to the group at 48% (+15.0% YoY) backed by new secured contracts from the re-clustered MOH Singapore hospitals. Singapore re-clustering exercise:

Progressively in FY19 Edgenta has managed to secure approximately RM944m worth of contracts (c. RM650m from new hospitals) from the re-clustering exercise by MOH Singapore. Of the RM944m contracts, c.RM188m is expected to be received annually; this makes up 17% of FY19’s healthcare revenue, and 8% of total revenue. Nonetheless, we are aware of the highly intense competitive environment in Singapore; Edgenta had to bid at competitive margins. Previously the contracts were for a duration of 1-2 years, whereas the current contracts would be mostly on 5 years with an option to renew for another 5. Edgenta will continue to focus on optimising the margins of the newly secured contracts through operational excellence. Malaysia:

Edgenta has recently started the Replacement Through Maintenance (RTM) in 5 MOH Malaysia hospitals and a Blood Bank Information System at MOH Malaysia’s blood banks and hospital which would include updates on availability and also facilitating the logistics. We feel these value-added services should aid in bringing up the margins moving forward.

Infrastructure Services. Edgenta received a road maintenance renewal contract for Cikampek-Palimanan Highway in Indonesia (via partnership with Astra Group) valued at c.RM182m for duration of 3 years (option 2 years extension) earlier this year. In Malaysia, Edgenta had its first “productisation” of RAMS technology solution for the Sarawak State Road. It is their comprehensive software that offers cutting-edge integrated highway maintenance system together with a cloud-based system that allows efficient work order management, remote monitoring that supports real-time decision making. In addition, the contract for upgrading works for sewerage treatment plants along the North South Expressway is set for 3 years. These new contracts would be able to defend stable revenue base for Edgenta in the coming years.

Consultancy. Opus job focus will be on delivering its services for the Sarawak Coastal Road Network and Second Truck Roads project (Phase 1 and 2) as well as Pan Borneo Highway Sarawak. For Pan Borneo Highway Sabah, Opus acts as the Lead consultant. Edgenta managed to step foot in Myanmar via O&M Consultancy for Yangon Expressway; proving that Edgenta is competent to be a regional player.

Outlook. Focus remains on growing top line whilst ramping up its technology cost efficiency drive to improve margins. We expect organic revenue growth to follow through in FY20. Edgenta has RM13.2bn of work in hand (end FY19).

Forecast. Unchanged as the briefing yielded no surprises.

Source: Hong Leong Investment Bank Research - 17 Mar 2020