INVESTMENT HIGHLIGHTS

• 4QFY16 normalised earnings within expectations

• Better contribution AC and IFM division during the quarter

• Another round of impairment losses on OSW recognised

• Earnings forecasts maintained

• Maintain NEUTRAL with unchanged TP of RM3.41

Within expectations. UEM Edgenta’s 4QFY16 normalised earnings came in at RM59m which is within our expectations. This brings its FY16 normalised earnings to RM190.9m. Revenue for the quarter declined by - 4.3% year-over-year while earnings increased by +5.7% over the same period. However, on a quarterly sequential basis, revenue increased by +18.3% while earnings grew by 15.5%.

Better contribution from AC and IFM division during the quarter. On year-over-year basis, the lower revenue and earnings were mostly due to: (i) loss of revenue from hospital support services (HSS) 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 from its asset consultancy (AC) business this quarter vs 4QFY15 by +1.3% which is mainly attributable to the higher revenue registered from Malaysia’s operation namely Lead Consultant for Pan Borneo Sabah project. Additionally, its integrated facilities management (IFM) division recognized a higher revenue of RM17.1m or +10.3% yearover-year. This is stemming from the revenue contribution from its recently acquired subsidiaries KFM Holdings and AIFS of RM37.8m and RM17.6m respectively.

Another round of impairment losses on OSW recognised. During the quarter, Edgenta recognised an impairment loss on its Canadian Opus Stuart Weir business unit amounting to RM42.5m. This is further to the impairment loss recognised on OSW back in second quarter worth RM68.3m. This brings the total impairment loss undertaken for OSW to amount to RM110.8m for the year (vs RM30.6m in FY15). The impairment loss includes a full impairment on its geomatics business in OSW. That said, management stated in the earnings announcement, it does foresee any further impairment loss from its Canadian operation. Having undergone the impairment, Opus will now concentrate on expanding its business in proven areas of specialties in growth sectors such as: transportation, building and water.

Earnings forecasts. We maintain our earnings forecasts for now pending its analyst briefing to be held tomorrow.

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 - 27 Feb 2017