Edgenta’s 1H21 core PATAMI to was below ours and consensus expectations, making up just 15.3% and 15.2% of full year forecasts respectively. The shortfall was due steeper than expected losses in the asset consultancy division and slower turnaround in the infrastructure services division from MCO restrictions on interstate travel. We reduce our FY21/22/23 earnings forecasts by 20.6%/7.6%/3.7%. After our earnings adjustments, our TP falls from RM2.40 to RM2.30. Maintain BUY.

Below expectations. 2Q21 core PATMI of RM8.1m (+21.4% QoQ, -56.7% YoY) brought 1H21 core PATAMI to RM14.8m (-51.3%), which was below ours and consensus expectations, making up just 15.3% and 15.2% of forecasts respectively. The shortfall was due steeper than expected losses in the asset consultancy division and slower than expected turnaround in the infrastructure services division from movement restrictions on interstate travel.

Dividend. 2Q21: None (1H21 DPS: None sen). 2Q20: 6 sen. 1H21: 6 sen

QoQ. Core PATAMI rose +21.4% in tandem with better revenue (+11.4%) mainly from rebound in infrastructure services workflow on expressway in Malaysia. However, we note that works are still significantly below pre-pandemic levels.

YoY. Despite infrastructure services revenue rising substantially by +40.3%, contribution at the PBT level declined from the start of lower margin infrastructure support service work for JKR. Lesser profitability in the healthcare support service division (HSS) was from increased maintenance work on healthcare equipment, which incurred higher cost (2Q21 PBT: RM11.6m vs. 2Q20 PBT: 18.8m). Overall, core PATAMI declined by -56.7%.

YTD. Steeper losses in the asset consultancy division (-RM9.4m LBT after adjusting for staff rationalisation cost vs. RM8.1m PBT in 1H20) was from lower workflow during the on-going movement restrictions. Edgenta have shared that they are currently undergoing some internal reorganisation. Note that Edgenta booked RM2.3m one-off staff rationalisation cost in 2Q21. In addition to weaker infrastructure services earnings (PBT -16.8%), mainly in 1Q21, core PATAMI declined by -51.3%.

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. 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 20.6%/7.6%/3.7% to account for steeper losses in the asset consultancy division and slower turnaround in the infrastructure services division from movement restrictions on interstate travel.

Maintain BUY, TP: RM2.30. Despite the earnings miss, and expected continued weakness in infrastructure services earnings going into 3Q21 from Phase 1 restrictions, we maintain our BUY rating as we believe Edgenta’s foray into digital ventures remains promising.

Source: Hong Leong Investment Bank Research - 27 Aug 2021