INVESTMENT HIGHLIGHTS

• Opus Canadian and Australian operations to remain subdued

• Opus New Zealand to remain the major revenue contributor

• Better contribution expected from Opus UK and Malaysia

• Full year contributions from KFM and AIFS to boost revenue

• FY17F earnings revised down by -6%

• Maintain NEUTRAL with a revised TP of RM3.36 Opus Canadian and Australian operations to remain subdued.

UEM Edgenta’s recently announced FY16 reported earning was marred by the impairment loss from its Canadian operation Opus Stewart Weir (OSW) and Australian operation. Despite not expecting any further downside from the two operations in FY17, management is expecting that both units will struggle to regain momentum in light of the weak economic backdrop. OSW will no longer be relying on its geomatics business which involves surveying and pipeline directly related to oil and gas sector. It will now concentrate on transport and water management.

Opus New Zealand to remain the major revenue contributor. We think that despite the persistent headwind faced by both its Canadian and Australian operations; its asset consultancy business segment will be supported by its New Zealand operation which contributes 80% of the Opus’s total revenue. Furthermore, we understand that the New Zealand government is currently faced with an inevitable road issue as the recent

Kaikoura earthquake that hits New Zealand has damaged its major roads in South Island which requires rebuilding. Management is expecting Opus to win some of the rebuilding works from the New Zealand Transport Agency (NZTA) this year.

Better contribution expected from Opus UK and Malaysia. In addition to the abovementioned facts, Opus’ operations in United Kingdom as well as Malaysia have shown encouraging improvement yearover-year by 4.4% and 17.1% respectively in terms of revenue. We think that the revenue will grow positively in FY17 given its good reputation in the UK and the opportunities arising from Malaysia’s infrastructure spending especially on the Pan Borneo Highway as well as the LRT extension projects. However, note that the collective contribution coming from both UK and Malaysia is smaller compared to its Canadian and Australian operations and would not be able to completely offset the lower revenue contribution from these countries for now

Full year contributions from KFM and AIFS to boost IFM revenue. In FY16, Edgenta acquired two new subsidiaries KFM Holdings and AIFS to its integrated facilities management (IFM) business segments. The acquisition of these subsidiaries which were completed back in March and December 2016, have yet to fully contribute to Edgenta’s group revenue. We estimate that these two IFM subsidiaries will contribute about RM300-350m in annual revenue which would help to offset the loss in revenue from East Malaysia’s hospital support services (HSS) concession.

Earnings forecasts. We are revising down our FY17F earnings estimates by -6% to RM210m (from RM223.3m previously) as we input a more conservative revenue growth for its asset consultancy business at 5% from 10% previously. This is due to the fact that we are expecting subdued revenue contributions coming from Opus’s Canadian and Australian operations. Note that Opus contributes >50% to Edgenta’s total revenue. Additionally, we are also introducing our FY18F numbers in this report.

Recommendation. We are maintaining our NEUTRAL call with a lower SOP-based TP of RM3.36 (from RM3.41 previously) on UEM Edgenta. Despite a brighter outlook for FY17 due to the expected increase in contribution coming from the IS and IFM business segments, we remain cautious on the performance of Opus in Canada and Australia which might offset the higher contribution from other business segments. That said, we take comfort in the fact that Edgenta’s orderbook for the entire group amounts to RM10b as disclosed by the management which we think should cushion its revenue for the near to medium term. We reiterate our view 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 meaningfulsized contracts that could contribute significantly to revenue and earnings.

Source: MIDF Research - 1 Mar 2017