We attended a meet and great session with Edgenta’s management. Edgenta will be focussing on careful cost management and protecting market share to remain resilient despite the outbreak of Covid-19. Edgenta believes their technology-driven platforms and solution will form the backbone of future earnings. We maintain our forecasts as the session yielded no major surprises. Maintain BUY with unchanged SOP derived TP of RM2.63.

We attended a meet and greet session with the newly appointed MD/CEO, En. Syahrunizam Samsudin (appointed on 1 Jul 2020). Here are some takeaways:

Recap. Edgenta reported 1HFY20 core PATMI of RM30.4m (-55.5% YoY). Core PATMI was attained after adjusting for net EI of -RM46.2m on gain on disposal (RM3k), net gain on foreign exchange (RM19.3m), net provision of impairment (- RM14.9m) and impairment on completed property inventories (biggest chunk, - RM50m). As at 30 Jun, 2020, Edgenta’s current order book stood healthily at RM12.2bn. Business division updates:

Healthcare. Constantly the highest revenue contributor at 59% (+9% YoY). 1HFY20 revenue increased slightly (+3.1% YoY). (i) Commercial business showed higher revenue contribution (+14.3% YoY) on the back of commencement of new contracts from Singapore and Taiwan. Despite the improved revenue, PAT fell (-35.8% YoY) as a result of margin contraction due to competitive bidding environment (in Singapore and Taiwan), increased operating costs (rise in minimum wages), changes of government labour regulation and Covid-19 pandemic (higher costs on more stringent hygiene requirements). (ii) Concession business revenue and PAT decline (-11.9%, - 81.1% respectively), this was due to comprehensive nature of concession business, where additional direct costs (consumables, labour and maintenance) had to be absorbed by Edgenta, paired with the completion of higher margin contracts back in FY19. Edgenta will be focussing on managing cost escalations through operational excellence initiatives and protecting market share by securing renewals of existing contracts apart from driven to penetrate new markets. With the easing of Covid-19 cases, we expect to see some normalization of costs in 2H.

Infrastructure. PROPEL, the second highest revenue contributor to the group at 28% (-8% YoY), saw a decrease in revenue (-31.3% YoY) and PAT (-32.9% YoY) in 1HFY20. The reduction was mainly stemmed from MCO which resulted in lower traffic in highways hence lower work volume and pavement work done. This led to the deferment of higher value infrastructure projects. We remain positive as traffic volumes recovered c.63% (compared to the c.-85% plunge during MCO) which would lead to more works flowing in. We can expect some ramp up on recovery of works that was postponed.

PFS. Property and Facility Solutions divisions revenue fell (-17.3% YoY) due to completion projects in Malaysia and Dubai and the delayed contract/tender awards. Still, PAT improved (+22.6% YoY) thanks to better margins attained from current contracts and cost management initiative. Edgenta is driven on exploring new opportunities; 2QFY20 has seen more commencement of energy performance contracting projects, which management feels has a promising outlook.

Consultancy. Opus showed a reduction in revenue (-27.3% YoY) for 1HFY20 caused by less consultancy work done during MCO, however PAT was lifted +31.3% YoY on forex gains. Edgenta will concentrate on delivering its existing projects; Coastal Road Network and Second Trunk Road Phase. Also, management shared that it is actively exploring opportunities in rail sectors and infrastructure projects, in line with the government’s move to resume discussions on projects.

Forecast. Unchanged as the session yielded no major surprises.

Maintain BUY, TP: RM2.63. We maintain our BUY call with unchanged SOP based TP of RM2.63.

Source: Hong Leong Investment Bank Research - 10 Sept 2020