INVESTMENT HIGHLIGHTS

• 1QFY18 normalised earnings within estimates at RM29.6m

• Contributions from healthcare services and PROPEL boosted revenue

• Revised dividend policy of up to 80% payout ratio

• FY18-19F earnings forecasts revised by +14.7% and +7.2% respectively

• Maintain BUY with revised TP of RM3.26 per share

1QFY18 earnings within expectations. UEM Edgenta’s 1QFY18 normalised earnings came in at RM29.6m which is within our full-year earnings estimates at 29.5% but below consensus’ at 20%. Revenue increased by +10.5%yoy whilst normalised earnings grew by +8.3%yoy respectively. On a quarterly sequential basis, both revenue and normalised earnings declined by -31.5% and -45.3% respectively.

Higher contributions from healthcare services. The higher revenue recorded year-over-year is 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 revenue from new contracts in the commercial healthcare services sector in Taiwan and Singapore which saw a +RM10m (+4.6% vs 1QFY17) revenue increase led by AIFS.

Infrastructure services supported by additional works. Meanwhile its infrastructure services under Projek Penyelenggaraan Lebuhraya (PROPEL) also recorded better revenue in 1QFY18 against 1QFY17 of +RM19.9m or an increase by 15.3% mainly driven by additional work secured for highway maintenance serves. In addition, the contribution from its consultancy division steadily increased by +13.3% mainly due to the Design and Project Management Work in Sabah and Project Delivery Consultancy Work in Sarawak.

Revised dividend policy of up to 80% payout. The management has recently announced that UEM Edgenta has revised its dividend policy of at least 50% and up to 80% payout ratio (from up to 70% previously) and dividends will be paid out on a semi-annual basis. We believe this is achievable as UEM Edgenta is currently in a net cash position and has been consistently been paying out >50% for the past three years. Our dividend assumption remains at 70% payout at this juncture.

Earnings forecasts. We are revising our FY18-19F earnings forecasts upward by +14.7% and +7.2% respectively as we are expecting improved contribution coming from both its healthcare services segment as well as its infrastructure segment due to the new contracts secured in 1QFY18 and in 4QFY17.

Recommendation. Post earnings announcement and revisions, we are reiterating our BUY recommendation on UEM Edgenta with a revised SOP-based TP of RM3.26 (previously RM3.09) as we roll forward our valuation base period to FY19. Despite the disposal of Opus International Consultants (OIC) last year, we are comforted by the fact that all its other business segments have started to contribute more positively in the absence of the volatility previously presented by OIC. We are also more positive on its infra segment under PROPEL as it continues to strive for new highway maintenance works. In addition, we are also seeing the improvement in terms of operational execution with the use of technology across the assets it currently manages which has translated into an improved revenue. Furthermore, we opine that the increasing need for more healthcare facilities around the region will bode well for UEM Edgenta’s healthcare services. It will enable the company to grow the healthcare services business organically and tap into underserved niche segments via AIFS which has network across Singapore, Taiwan and Malaysia. As of 1QFY18, UEM Edgenta is also in a net cash position of RM86m with an attractive FY19F dividend yield of 6.0% to yesterday’s closing price.

Source: MIDF Research - 24 May 2018