INVESTMENT HIGHLIGHTS

• 3Q16 earnings within expectations

• Better contribution from Opus and IFM division

• Potentially better quarters ahead

• Earnings forecasts maintained

• Maintain NEUTRAL with unchanged TP of RM3.41 per share

Within expectations. UEM Edgenta’s 3Q16 PATAMI came in at RM51.1m. Its 9M16 PATAMI of RM63.6m kept pace with our expectations but fell short of consensus’. Revenue was down marginally by -1.3%yoy while PATAMI declined by -26.9%yoy. However, on a quarterly sequential basis, revenue was up by +3.9%qoq while PATAMI increased by >100%qoq. Recall that in 2Q16, Edgenta recognized a one-off impairment loss on goodwill relating to its Canada-based subsidiary Opus Stewart Weir (OSW) and Australian operations (totaling RM68.3m) as well as an impairment loss on joint venture amounting to RM3.91m which significantly dragged its 2Q earnings.

Better contribution from Opus and IFM division. On a year-overyear basis, the lower revenue and earnings were mostly due to: (i) loss of revenue from hospital support services (HSS) coming from East Malaysia; (ii) completion of North-South Expressway fourth lane widening works in 2015 as well as; (iii) unfavourable economic environment affecting OSW. However, we note that there was an improvement in contribution coming from Opus this quarter vs 2Q by +5.7% which is mainly attributable to the strengthening of NZD against MYR which resulted in a favourable impact to revenue by RM20.9m. Additionally, its integrated facilities management (IFM) division which was previously reeling from the loss of contribution of its East Malaysia HSS, recognized a higher revenue of RM10.1m or +7.3qoq. The higher segment revenue is from the higher recognition of revenue from its new subsidiary, KFM Holdings.

Potentially better quarters ahead. Despite only meeting 53% of our current year’s earnings estimates this quarter, we believe that Edgenta will be able to repeat 3Q’s performance in 4Q16. This is premised on improving contributions from Opus NZ operations. Edgenta is also in the midst of acquiring Asia Integrated Facility Solutions (AIFS) which is expected to be completed in December 2016. This, we believe would immediately start contributing positively from 2017 onwards to its earnings as it leverages on AIFS network of existing regional HSS operation. Additionally, with the weakening of MYR of late, we think that it will be favourable in terms of foreign exchange translation for Edgenta in the coming quarter.

Earnings forecasts. We maintain our earnings forecasts for now as we believe Edgenta is on track to meet our earnings forecasts.

Recommendation. We are maintaining our NEUTRAL call with an unchanged SOP-based TP of RM3.41 on UEM Edgenta as we remain cautious on the prospects of its overseas operation due to the current uncertain economic condition especially the ones affecting OSW and its Australian operation. That said, we take comfort in the fact that Edgenta is actively on the lookout for new contracts and opportunities to strengthen its core business which will continue to bode well for the company in the current challenging environment. We opine that the potential re-rating catalyst for Edgenta would be in the form of: (i) significantly better quarterly earnings performance; (ii) recovery in margins and; (iii) winning meaningful-sized contracts that could contribute significantly to revenue and earnings.

Source: MIDF Research - 25 Nov 2016