INVESTMENT HIGHLIGHTS

• 3QFY17 normalised earnings above estimates at RM38.7m

• Contributions from healthcare services and PROPEL boosted revenue

• OIC is set to exit Edgenta by year end

• FY17-18F earnings revised upwards

• Upgrade to BUY with a revised TP of RM3.09 per share

3QFY17 earnings above expectations. UEM Edgenta’s 3QFY17 normalised earnings came in at RM38.7m. This brings its 9MFY17 earnings to RM93.4m which is above our estimates of RM114.3m at 81% of full-year earnings. Revenue (including OIC portion) grew by +24.6%yoy whilst PBT declined by -19.7%yoy respectively. However, on a quarterly sequential basis, both revenue and PBT increased by +5.1% and +43.5% respectively. No dividend was declared for the quarter.

Higher contributions from healthcare services and PROPEL boosted revenue. The higher revenue recorded both year-over-year and quarter-over-quarter was mostly due to improvements in terms of revenue contribution recorded across its business segments. The higher revenue year-over-year during the quarter was mainly attributable to higher contribution from its healthcare service division which recorded an increase in revenue by +RM119.3m (>100% vs 3QFY16) led by AIFS. Meanwhile its infrastructure services under Projek Penyelenggaraan Lebuhraya (PROPEL) also recorded better revenue in 3QFY17 against 3QFY16 of +RM47.4m or an increase by 27.4% mainly driven by higher civil and pavement works carried out on expressways and contribution from projects in Indonesia.

OIC is set to exit Edgenta by year end. After receiving the approval from its Board of Directors on 2nd of November 2017, Opus International Consultants (OIC), the overseas consultancy unit of Opus Group will cease to be part of UEM Edgenta by end-2017. Its revenue and earnings will still be consolidated for FY17 however, it will no longer be consolidated from January 2018 onwards.

Earnings forecasts. Post earnings announcement, we are revising our FY17-18F earnings forecasts upwards by +10% and +23% to RM125.8m and RM100.2m respectively as we expect earnings going forward to be supported by organic growth in various business segments and lower costs arising from a more efficient and productive operations across business segments.

Recommendation. Post earnings revision, we are upgrading our recommendation on UEM Edgenta to BUY (from Neutral previously) with a revised SOP-based TP of RM3.09 (from RM2.86 previously). Despite Opus International Consultant (OIC) will cease to be a part of Edgenta in FY18, we note that most of Edgenta’s business segments have started turning around and new acquisitions such as AIFS and KFM are starting to contribute more significantly to the group’s revenue. In addition, we are more positive on its asset consultancy business in Malaysia post-OIC which will remain focused on delivery of major road and infrastructure projects in both Peninsular and East Malaysia. The Malaysian consultancy business is also more stable unlike its overseas counterpart in Australia and Canada. Furthermore, we opine that Edgenta’s effort to grow its healthcare services business organically via AIFS and the new healthcare budget announced for Malaysia and Healthcare 2020 Masterplan in Singapore will bode well for the company going forward.

Source: MIDF Research - 29 Nov 2017