INVESTMENT HIGHLIGHTS

• Higher contribution expected from healthcare services

• Infrastructure services margins to further improve

• Brighter prospects for real estate services

• Current value of work-in-hand amounting to RM13.5b

• Maintain BUY with an unchanged TP of RM3.26 per share

Higher contribution from healthcare services. Healthcare services (HS) segment revenue contribution is expected to increase with the new contracts secured both in Taiwan and Singapore. UEM Edgenta Bhd (Edgenta) has recently secured and renewed some of its existing hospital services contract such as Sengkang General Hospital in Singapore as well as 1,800-bed Tri-Service General Hospital and Far Eastern Memorial Hospital in Taiwan.

Infrastructure services profit margins set to improve further. Management revealed that it has finally converted its input-based contract (IBC) with PLUS Malaysia Bhd (PLUS) to a performance-based contract (PBC) as at 1st August 2018. This entails an improvement in maintenance deliverables which would translates into cost savings for both Edgenta and PLUS. While the first phase of PBC has begun last month, the full adoption of PBC will begin in January 2019.

Bright prospects for real estate services. The company has recently secured several new contracts for facilities management, township management and energy performance contracting services for CIMB buildings, TRX, Medini Iskandar and German-Malaysian Institute. Despite the segment’s contribution to Edgenta’s topline and bottomline is only approximately 10% at this juncture, we opine that this segment has a big growth potential given the increasing emphasis on environmental issues such as energy savings and reducing carbon emissions. In addition, the growing demand for technologically-driven solutions will also drive this segment going forward.

Existing value of work-in-hand at RM13.5b. Edgenta’s current workin-hand value is estimated at approximately RM13.5b as of 30 June 2018. The breakdown consists of 29% from the Healthcare services, 67% from the infrastructure services while the remaining 4% stem from consultancy.

FY18-19F earnings maintained. We are making no changes to our FY18-19F earnings estimates at this juncture. We are expecting higher contribution from the healthcare services segment and the benefits from the implementation of PBC to positively impact the group’s bottomline.

Reiterate BUY. We are reiterating our BUY recommendation on UEM Edgenta with an unchanged SOP-based TP of RM3.26 per share. We remain optimistic on Edgenta’s growth prospect going forward to be led by AIFS as well as PROPEL where it can leverage on its proven track record in providing expert facilities management services in these segments. For the healthcare services we opine that aside from securing new and renewing existing contracts, growth opportunities will come from cross-selling between its commercial and concession healthcare services. Additionally, we foresee the restructuring of cluster hospitals by Singapore’s Ministry of Health will present valuable opportunities for Edgenta to secure new wins leveraging on its expertise in healthcare services. As for the facilities management, increasing awareness in environment preservation and technologically-driven solutions will fuel the demand for this segment which will eventually lead to cost savings and creating environmentally-friendly condition for its clients.

Share price weakness presents a buying opportunity. Edgenta’s share price performance YTD has been persistently weak. It has been further exacerbated by the outcome of the recent GE14 - which we believe is unjustified given that all its concession contracts remain intact. Hence, we view this presents as an opportunity to accumulate the stock given that fundamentals remain resilient and growth prospects across all of its business segments remain strong proven by a commendable 1HFY18 earnings performance and years of proven track record. Furthermore, Edgenta’s balance sheet remains robust with a negligible net gearing and an attractive FY19F dividend yield of 5.4% to yesterday’s closing price. It is also worth noting that, 90% of Edgenta’s revenue and profits come from resilient sectors such as healthcare and infrastructure with 80% of it recurring in nature due to the concessions - which signals stability and provides clear earnings visibility.

Source: MIDF Research - 5 Sept 2018