• Proposed disposal of 61.2% equity interest in OIC

• Total cash consideration of between RM504.1-523.9m

• Limiting exposure to the volatile overseas market

• FY17-18F earnings revised downwards by -27.2% and -57%

• Maintain NEUTRAL with a revised TP of RM2.86 per share

Proposed disposal of 61.2% equity interest in OIC. UEM Edgenta announced that it has entered into an agreement with WSP Global Inc. (WSP) to dispose its 61.2% equity interest in Opus International Consultants Limited (OIC). The proposed disposal which is expected to be completed by end-2017 will see Edgenta exiting its overseas asset consultancy business which has been under pressure from the slowdown in economic activities in the countries it operates in especially in Canada and Australia. However, it will be retaining its Opus Malaysia operation.

Total cash consideration of RM504.1-523.9m. WSP has offered a total cash consideration of NZD1.78 per share of OIC for the disposal which is a premium of 86.9% over its last traded price of NZD0.99. It is also a 58.1% premium to OIC’s 52-week high daily closing price. In addition, WSP will also allow any dividend to be declared by OIC to Edgenta of up to NZD0.07. Based on Edgenta’s 90.5m shareholding in OIC, Edgenta will be receiving a total cash consideration between NZD161.1m (about RM504.1m) assuming if no dividends are declared by OIC or NZD167.4m (about RM523.9m) if dividends are declared. The proceeds will be utilised to pare down its borrowings and for working capital purposes.

Limiting the exposure to the volatile overseas market. We are positive on this disposal news as with the proposed disposal, Edgenta will no longer be exposed to OIC’s operations in Canada and Australia which for the past two years have been hit by soft economies and slowdown in the oil and gas industry. The revenue and profit coming from OIC have been on a decline and missing earnings estimates since FY15 and having incurred audited loss after tax of NZD29.9m (about RM86.3m) in FY16. In addition, as part of the proceeds will be utilised to repay its debts, this will result in an estimated cumulative interest savings of about RM14.2m in the next two financial years.

Earnings forecasts. As Opus Group contributes about 50% of Edgenta’s total revenue and contribution from OIC is about 90% of the Opus Group’s contribution, the impact on earnings going forward will be significant. This is due to OIC making up effectively 45% of Edgenta’s total revenue. Due to that, we have reduced our earnings estimates for FY18F by -57% to account for the loss in contribution from OIC and slower recovery in PROPEL’s orderbook. Meanwhile, we have also revised our FY17F earnings estimate by -27.2% to account for the persistent challenging operating environment faced by Opus this year.

Recommendation. We revised our SOP-based TP to RM2.86 (from RM3.42 previously) after we adjusted our earnings estimates for FY17F and FY18F, while maintaining our NEUTRAL call on UEM Edgenta. Despite being positive on the disposal news, we view that to close the big revenue and earnings gap left by OIC will remain its biggest challenge going forward in addition to its current effort in plugging the leakage from the Sabah and Sarawak hospital concession. That said, we take comfort in the fact that most of Edgenta’s business segments are finally turning around and the new acquisitions starting to contribute to the group’s revenue. 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 meaningful-sized contracts that could contribute significantly to revenue and earnings.

Source: MIDF Research - 15 Aug 2017