INVESTMENT HIGHLIGHTS

• Margin expansion for healthcare services to continue with persistent cost optimization initiatives

• Infrastructure services contribution to improve further with full-implementation of performance-based contract (PBC)

• Property & Facility Solutions growth prospects remain high

• Current value of work-in-hand amounting to RM13.4b

• Maintain BUY with an unchanged TP of RM3.28 per share

Resilient contribution from healthcare services continues. Healthcare services (HS) segment showed encouraging improvement in terms of both revenue and PAT registering high single digit increase of +7.9% and +6.8% year-over-year respectively. This is coupled with net margin expansion for its healthcare concession business to 9.5% (from 8.2% in FY17) despite the concession rates being relatively unchanged for the past few agreements. This is due to the company’s continuous effort in reducing costs associated with operating the concession business. Meanwhile, the commercial healthcare segment remains robust despite registering a decline in margin to 8.5% (from 9.6% in FY17) due to intense competition in Singapore. Healthcare services contribute about 45% to both Edgenta’s revenue and PAT.

Healthcare concession agreement due for renegotiation, however…. We understand from the Management that it is due to renegotiate with the Ministry of Health (MoH) on among others, its concession rate in the 2HFY19. While the renegotiation might signal a potential upward revision in its concession rate however, Management remains conservative as it reflects on the Government’s current financial standing. That said, going forward the segment will continue to be driven by the ongoing cost optimization initiatives as well as; potential new contracts to be secured in the commercial healthcare segment. This will ensure the growth of both topline as well as; bottomline for the segment.

Infrastructure services profit margins set to improve further. Management revealed that it has finally fully converted its input-based contract (IBC) with PLUS Malaysia Bhd (PLUS) to a performance-based contract (PBC) will begin in January 2019. This entails an improvement in maintenance deliverables which would translates into cost savings for both Edgenta and PLUS.

The pilot phase of PBC has begun back in August 2018. With the full-year implementation of PBC, we opine that further improvement in terms of margin which incorporates the full impact of the implementation of PBC will be more visible from FY19 onwards. As of FY18, the margin for the infra segment was recorded at 8.6% which is an increase from FY17’s margin of 7.0%.

Growth prospects for Property & Facility Solutions segment to be technologically-driven. 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. Currently, Edgenta continues to be at the fore-front in providing differentiated and technologically-driven solutions to its clients.

Existing value of work-in-hand at RM13.4b. Edgenta’s current work-in-hand value is estimated at approximately RM13.4b as of 31 December 2018 with various recognition periods. The breakdown consists of 29% from the Healthcare services, 65% from the infrastructure services while the remaining 3.6% stem from consultancy.

Source: MIDF Research - 6 Mar 2019