Edgenta’s 2Q22 core PATAMI of RM9.8m (-11.6% QoQ, +21.0% YoY), brought 1H22 core PATAMI to RM21.0m (+35% YoY). The results formed 13% and 12% of our and consensus estimates, but we still deem the performance within expectations, as Edgenta’s 4Q performance is typically stronger, accounting for 40-50% of full year forecasts. We make no changes to our earnings forecasts, but we have lowered the PE multiple ascribed to Opus to 11x (from 15x previously) to be more in line with the construction sector. Our discount rate is also raised to 10%, to reflect the rising rates environment. As a result of that, our SOP-derived TP is lowered to RM1.54, (from RM1.70 previously). Valuations remain attractive as it is currently trading at a P/B multiple of 0.68x, which is close to -2SD of its 7-year mean. Reiterate BUY on Edgenta.

Deemed in line. Edgenta’s 2Q22 core PATAMI of RM9.8m (-11.6% QoQ, +21.0% YoY), brought 1H22 core PATAMI to a sum of RM21.0m (+34.5% YoY). The results formed 13% and 12% of our and consensus estimates, but we still deem the performance within expectations, as Edgenta’s 4Q performance is typically stronger, accounting for 40-50% of full year forecasts. Our 1H22 core net profit of RM21.0m is arrived at after adding back EIs (mainly net impairment of trade receivables) amounting to RM0.7m.

Dividend. None declared (2Q21: None declared). 1H22: None. (1H21: None)

QoQ. Revenue grew 16.4% QoQ, as all segments reported stronger contribution (Healthcare Support (HSS): +4.0%, Infrastructure Services (IS): +49.8%, Property Facilities Solution (PFS): +23.7%, Asset Consultancy (AC): +2.5%). Growth in both IS and AC segments were due to higher more consultancy and maintenance work being carried out, while the better showing in both PFS and HS segments were supported by new contracts secured both locally and outside of Malaysia. Despite growing top-line, core PATAMI declined by 11.6%, as core PATAMI margin narrowed slightly, by 0.5ppts, as a result of cost inflation (higher staff cost due to raising of minimum wage).

YoY. Driven by post-pandemic recovery, revenue grew 16.5% supported by improvement in most of its key operating segments (HSS: +8.9%, IS: +40.9%, AC: +28.7%). PFS revenue contribution was flat (-0.1%), due to lesser ongoing projects – losing some tender projects to pricing competition and clients’ reduced willingness to spend. On a separate note, its AC segment has turned profitable, reporting a PBT of RM2.6m (vs 2Q21 -RM7.9m), as the lifting of movement controls has allowed Edgenta to deploy resources to East Malaysia to carry out consultancy work. In tandem with the growing revenue, core PATAMI also saw a 21.0% boost.

YTD. The 14.2% growth in revenue was on the back of stronger contribution from AC (+29.5%), HSS (+11.2%) and IS (+32.5%), as the HSS segment secured more new contracts, while the IS segment carried out more maintenance work. The PFS segment reported lower revenue contribution (-17.5%) due to the same reason mentioned in YoY. All in, core PATAMI was 34.5% stronger.

Outlook. Edgenta’s orderbook currently stands at RM10.5bn as the Group has continued to clinch new contracts in 1H22. The new contract wins are mainly international market and technology-enabled contracts, both collectively accounting for c.70% of the new wins. While higher costs will undoubtedly impact Edgenta’s margins, we gather that Edgenta will continue to negotiate with clients to pass on some of the costs, while at the same time proactively mitigating the impact via cost rationalisation strategies as well as improving its overall efficiency.

Forecast. Remain Unchanged.

Maintain BUY, TP: RM1.54. To be more in line with the construction sector, we lower the PE multiple ascribed to Opus to 11x (from 15x previously). Our discount rate is also raised to 10% from 9%, to better reflect the rising rates environment. As a result of that, our SOP-derived TP is lowered to RM1.54, (from RM1.70 previously). Valuations remain attractive as it is currently trading at a P/B multiple of 0.68x, which is close to -2SD of its 7-year mean. Reiterate BUY on Edgenta.

Source: Hong Leong Investment Bank Research - 26 Aug 2022