KEY INVESTMENT HIGHLIGHTS

• UEM Edgenta’s 3QFY19 earnings declined marginally by - 1.6%yoy to RM17.3m

• Earnings supported by strong revenue contribution from healthcare support and property and facilities solutions

• Margins remains stable cushioned by strong healthcare concession division

• Current work-in-hand relatively unchanged at RM13.3b

• FY19-20F earnings revised slightly by -5.0% and -6.8%

• Maintain NEUTRAL with a revised TP of RM3.22 per share

UEME’s 3QFY19 earnings flat year-on-year at RM17.3m. UEM Edgenta Berhad’s (Edgenta) 3QFY19 net profit came in flat year-overyear at RM17.6m. This brings its 9MFY19 cumulative earnings to RM84.3m which is broadly within our expectations. Comparing against 3QFY18, revenue was higher by +11.2% premised on higher contribution from its healthcare support (HS) segment. However, earnings was flat, registering a marginal decline of -1.6%yoy attributable to higher operational costs incurred during the quarter for its HS and infrastructure services (IS) segments. Meanwhile on a quarterly sequential basis, revenue declined marginally by -1.3% whilst earnings dipped by -49.7% respectively. This was primarily attributable to lower revenue recognition from its HS concession segment and higher operational costs.

Healthcare Support Services. The segment’s revenue increased by +9.5%yoy driven by new contracts secured from across the region throughout the year. Meanwhile, PBT was lower by -8.0yoy primarily attributable to intense competition on the commercial healthcare support division especially from the Singapore cluster hospitals. This is further exacerbated by lower revenue recognition from the concession side. That said, PBT margin improved during the quarter at 8.4% vs 7.1% in 3QFY18 owing to improved margin from the concession division.

Property and Facility Solutions. Segment revenue grew by +43.2%yoy driven by the new contracts secured in 1HFY19. This includes contracts won to manage Bank Negara Malaysia (BNM) and Sime Darby Motors facilities among others which see the first quarter of revenue contribution in 3QFY19. Additionally, margin for the division has also remained relatively stable at 5.3% when compared against the same period last year.

Infrastructure Services. Segment revenue grew modestly by +5.1%yoy during the quarter which is attributable to higher number of works done for expressways during the quarter. However, its PBT was down by -18.4%yoy during the quarter mainly due to increased operational costs for the division.

Asset Consultancy. The segment’s revenue grew by +35.3%yoy driven primarily by works done on projects in East Malaysia. However, the segment remains unprofitable during the quarter due to lower margins from its current works.

Work-In-Hand remains relatively unchanged. Edgenta’s current work-in-hand as of September 2019 remains relatively unchanged at RM13.3b. Out of the RM13.3b, 59.5% of its work-in-hand is attributable to its infra services division, whilst 33.1% is from healthcare support. The balance of 3.79% and 3.6% are attributable to its asset consultancy as well as; the PFS division respectively.

Earnings impact. While we expect earnings in 4QFY19 to come in stronger as it is traditionally the strongest quarter for Edgenta, we are trimming our FY19-20F earnings slightly by -5.1% and -6.8% respectively as we expect margin for its healthcare support division to be slightly compressed from the business acquisition costs incurred by its commercial side as well as intense competition in that area. Furthermore, we are also expecting its IS division’s performance to remain lackluster in the near term given the current development on PLUS highway takeover which might limit project awards coming from PLUS.

Maintain NEUTRAL with a revised TP of RM3.22. Post earnings revision we are maintaining our NEUTRAL recommendation on Edgenta with a revised SOP-based target price of RM3.22 (from RM3.45 previously). We opine that this is fair given that we anticipate margin compression in its commercial healthcare support division as well as; the lackluster performance from both its IS and asset consultancy divisions to weigh on earnings growth going forward. That said, we do believe that the improving performance of its healthcare concession as well as the PFS divisions will cushion the impact on earnings from the three divisions as evident in the commendable margins reported by these two divisions.

Source: MIDF Research - 25 Nov 2019