INVESTMENT HIGHLIGHTS

• Healthcare Services to continue driving earnings

• Property portfolio under PFS to include more industrial-based properties

• Consultancy division to be cushioned by Coastal Highway project in Sarawak

• FY19-20F earnings maintained for now

• Maintain NEUTRAL with a revised TP of RM3.45 per share

Healthcare services to continue driving earnings. UEM Edgenta Bhd’s (Edgenta) healthcare services (HS) division is expected to remain as its major earnings driver going forward. As of 1HFY19, HS contributed 50% to Edgenta’s total revenue and we opine that it will remain as the main revenue and earnings contributor going forward. This is due to the continuous improvement in terms of margins that was observed for its concession segment; attributable to increased efficiency and adoption of technology in managing the hospitals. As of 1HFY19, its concession segment recorded a PAT margin of 11.8% vs 9.0% in FY18 whilst its commercial segment recorded a PAT margin of 7.6% in 1HFY19 vs 8.5% in FY18. The decline in margins for its commercial segment is expected given the stiff competition in the area coupled with higher expenses incurred to acquire new customers. Nevertheless, the commercial margin is commendable given the competitive environment it operates in.

Rebalancing its PFS property portfolio. Under its property and facility solutions (PFS) division, Management is looking into diversifying and re-balancing its portfolio of properties under management to include more industrial-based properties. These properties include: warehouses, factories, refining facilities etc. This, we opine will be beneficial for Edgenta given that these facilities requires experienced management and in some area; niche expertise to maintain the facilities which will put Edgenta at an advantage to win these contracts.

Coastal Highway in Sarawak to cushion consultancy division. While the consultancy division’s revenue and earnings are currently under pressure due to do impending restructuring of work orders as well as; high cost incurred in engaging with other parties for its Pan Borneo Sabah project – as the project now falls under the jurisdiction of Jabatan Kerja Raya, Sabah; we opine that this will be cushioned by the Coastal Highway project secured in Sarawak.

Furthermore, we believe that once the work orders for Pan Borneo Sabah has been sorted, we will see better recognition in terms of both revenue and earnings coming from its consultancy arm. On the potential Peninsular Malaysia consultancy projects, Management disclosed that it is currently looking into several rail-related projects however; these are still in early stages.

Earnings forecasts. We are maintaining our FY19-20F earnings forecast at this juncture as we expect its 2HFY19 earnings to come in stronger compared to 1HFY19. This is due to it being a seasonally stronger period for Edgenta.

Target Price revised to RM3.45. We have revised our SOP-based TP for Edgenta to RM3.45 per share (from RM3.28 per share previously). The change to our TP is as a result of the revision on our margins assumptions for each of the business segments.

Recommendation. Pending further news flow on new contract wins, we are maintaining our NEUTRAL recommendation on UEM Edgenta at his juncture. Though we remain optimistic on Edgenta’s growth prospect going forward; as mentioned in our recent earnings report we opine that all the positives have been priced in at this juncture. Edgenta’s share price has also risen by more than 15% since our last TP revision (to RM3.28, back in February 2019) which we believe now limits the room for further share price appreciation.

That said, we remain comforted by the fact that Management is continuously working on improving its service delivery and implementing lean processes in order to drive revenue and expand margins. Edgenta is also quick to realise and react on business ventures that are deemed unfeasible which we opine will assist the company in terms of margin preservation. We are also positive on the fact that it continues to leverage on its robust network of technology infrastructure coupled with its proven track record to provide expert facilities management services in both the expressway maintenance as well as; the property management divisions. In addition, its balance sheet remains robust at a net cash position and its dividend yield remains decent at 4.4% FY20F.

Source: MIDF Research - 5 Sept 2019