Orderbook replenishment. Despite the challenging operating environment throughout FY21, Edgenta has managed to close the year with c.RM1bn worth of contract wins, bringing total orderbook to a sum of RM10.8bn as at 31 Dec 2021. The orderbook is expected to last until year 2038 and will provide resiliency in both cash flow and revenue until then. Bulk of the orderbook replenishment were secured by its healthcare services (HSS) segment (c.68%), predominantly in the commercial space, from markets like Malaysia, Taiwan and Singapore. It is also worth noting that 54% of the Edgenta’s total contract wins were from international markets, proving its strategy to diversify geographically to be effective.

Focus of the future. Going forward, Edgenta will concentrate on recalibrating its business and will rely on its HSS segment to bring the Group back to its pre-pandemic levels (earnings wise). Edgenta will also continue expanding the HSS segment both locally and regionally. The HSS segment in Malaysia will pivot beyond its current offerings that are more facilities management focused, to evolve and participate in digital healthcare (via QuickMed), more specific technical services (via BEMS) and also augmentation of healthcare facilities for the public healthcare system (i.e. hybrid ICUs). Regionally, Edgenta will target markets with high growth (have displayed a CAGR of more than 25%) and better margins (more commercial jobs). As for its infrastructure services (IS) and property facility solutions (PFS) segment, the Group’s aim will be to manage the existing orderbook with the most cost efficient way possible.

Asset consultancy (AC). Edgenta’s AC segment took a hit in FY21 due to the implementation of movement controls and the Group was unable to mobilise staff to East Malaysia to carry out consultancy work during the period. While the situation will undoubtedly improve in FY22, given the absence of movement controls, we think that further job wins for this segment will be slow in FY22, given that general elections in Malaysia could potentially take place this year. Nevertheless, management is also looking at opportunities in the telecommunication, energy and water sectors.

Impact of potential revision in minimum wage. The Human Resource Minister, Datuk Seri M Saravanan, had earlier announced that the government is in the midst of reviewing and revising the minimum wage in Malaysia. This proposed plan will raise the minimum wage from the existing RM1,200, to a new rate of RM1,500. We gather that approximately 4k staffs in Edgenta will be affected by this implementation. Should the minimum wage be revised, that would result in c.RM4m increase in staff cost. That said, we highlight that some of the contracts in hand would have taken inflation into account, while some would include a clause to allow for rate revision every 3-4 years or when an out of ordinary event occurs. Edgenta’s constant efforts in optimising and streamlining the business to improve overall operational efficiency should also help cushion some of the impact.

Forecast. Despite expecting sequential topline growth going forward, we still cut our earnings forecasts for FY22-23f by 22-24%, as we lower our margin assumption to take into account the inflationary pressures, as well as its inability to pass on the higher cost arising from its concession business.

Maintain BUY, TP: RM1.86. Following our earnings cut, we lower our TP on Edgenta to RM1.86, from RM2.23 previously. We keep our BUY call on Edgenta, as we are still expecting sequential recovery going forward, supported by the reopening of economies and also its new digital initiatives.

Source: Hong Leong Investment Bank Research - 28 Feb 2022