Edgenta’s 1Q21 core PATMI of RM6.7m (-80.8% QoQ, -42.4% YoY) was below ours and consensus expectations, due to weaker than expected profitability in the infrastructure solutions division from lesser maintenance work conducted as a result of the MCO imposed in Jan-21. We reduce our FY21/22/23 earnings forecasts by 5.4%/2.7%/0.9% to account for slower than expected turnaround in Infrastructure services profitability. We lower our TP from RM2.53 to RM2.40 but maintain BUY.

Below expectations. 1Q21 core PATMI of RM6.7m (-80.8% QoQ, -42.4% YoY) was below ours and consensus expectations, making up just 6.5% and 6.2% of ours and consensus earnings forecasts respectively. The shortfall was due to weaker than expected profitability in the infrastructure solutions division from lesser maintenance work conducted as a result of MCO2.0 imposed in Jan-21.

Dividend. 1Q21: None Declared. 1Q20: None.

QoQ. Infrastructure segment revenue (-36.7%) and PBT (-54.3%) decreased due to lesser maintenance work performed for expressways. Weaker contribution in the healthcare support services (HSS) division (-64.6% at the PBT level) was due to one off grant by the Singapore government in 4Q20. Overall, core PATMI shrank -80.8% in tandem with lower sales (-20.4%) due to reasons mentioned above and seasonality. Note that 4Q is typically a seasonally strong quarter, historically accounting for ~50% of full year earnings.

YoY. Healthcare support services revenue (+12.8%) and PBT (+126.1%) was higher YoY due to healthcare contracts secured in Malaysia, Taiwan and Singapore. Property and Facilities Solutions grew YoY (revenue: +27.7%, PBT: 1.2%) from new facilities maintenance and energy performance contracting projects. However, this was more than offset by lesser profitability in the infrastructure division (revenue: - 34.7%, PBT: -57.2%), which was due to lesser maintenance work performed for expressways during the MCO. Note that 1Q20 had 2.5 months free of MCO. Overall, core PATAMI declined by 42.4%.

Outlook. Edgenta believes that HSS will continue to drive their post-pandemic recovery, as the group have accelerated regional expansion efforts as well as introducing new-to-market solutions beyond the traditional healthcare offerings. Edgenta sees opportunity in new high growth markets such as Saudi Arabia. Edgenta had recently entered into a Memorandum of Business Exploration agreement with Asma Advanced Solutions LLC, to identify strategies to capture HSS and Integrated Facilities Management markets in Saudi Arabia. With regards to the Infrastructure Solutions division, profitability will be greatly reliant on Malaysia’s ability to keep Covid-19 cases under control and relax MCO restrictions, which would lead to more movement of people, and hence maintenance work on expressways.

Forecast. We reduce our FY21/22/23 earnings forecasts by 5.4%/2.7%/0.9% to account for slower than expected turnaround in Infrastructure services profitability.

Maintain BUY, TP: RM2.40. Despite the earnings miss, and expected continued weakness in infrastructure services earnings going into 2Q21 from MCO3.0, we maintain our BUY, as we expect the share price to be supported by (i) reasonable valuations of 15.3x forward PE (vs. 10 year average of ~21.5x) (ii) dividend yield of 4.6%. After our earnings adjustments, our TP falls from RM2.53 to RM2.40.

Source: Hong Leong Investment Bank Research - 28 May 2021