KEY INVESTMENT HIGHLIGHTS

• UEM Edgenta’s 3QFY20 normalised earnings dipped by - 212.4%yoy to -RM19.4m

• Lower revenue recorded across its business segments following enforcement of RMCO

• PBT margin across all business segments contracted attributable to higher operating costs resulting in margin compression

• FY20-21F earnings estimates revised down by -51.2% and - 5.7%

• Maintain BUY with a lower TP of RM3.06 per share

UEME’s 3QFY20 earnings missed expectation at -RM19.4m. UEM Edgenta Berhad’s (Edgenta) reported a net loss of -RM19.4m in 3QFY20. This brought its cumulative 9MFY20 earnings to RM14.8m which missed our and consensus’ FY20 expectations both at <10% respectively. Comparing against 3QFY19, revenue was lower by -17.8% premised on lower contribution from both its property and facility solutions and infrastructure solutions (PROPEL and OPUS) segments. Consequently, earnings also dipped by -212.4%yoy, attributable to the margin compression experienced by its concession healthcare division and lesser works undertaken by PROPEL due to the enforcement of recovery movement control order (RMCO). Meanwhile on a quarterly sequential basis, revenue improved by +7.7%qoq whilst normalized earnings contracted by -184.1%qoq respectively. Despite the higher revenue quarter-over-quarter, the dip in earnings was primarily attributable to higher operating costs incurred across the segments as it adapts to operating under a new normal environment.

Healthcare Support Services. The segment’s revenue increased by +16.2%yoy driven by higher work orders executed during the quarter in both Singapore and Taiwan. However, this was negated by the lower contribution from the Malaysian operations following the completion of several contracts in FY19. Meanwhile, PBT dipped by -39.5yoy primarily attributable to increase in costs coming from its Malaysian operation. This was further exacerbated by the intense competition on the commercial healthcare support division especially from the Singapore cluster hospitals arising from the re-clustering exercise. The abovementioned reasons have resulted in PBT margin contracting to 3.7% during the quarter vs 7.1% in 3QFY19.

Property and Facility Solutions. Segment revenue declined by - 37.0%yoy to RM33.9m (from RM53.8m in 3QFY19) attributable the recent cessation of its township management project JV in Johor with UEM Sunrise and completion projects in Malaysia and Dubai. Consequently, PBT for the division also dipped by -89.5%yoy which was primarily driven by lower margin from its on-going projects. Consequently, PBT margin for the division declined to 0.9% vs 5.1% in 3QFY19 during the quarter.

Infrastructure Services. Segment revenue dipped -52.0%yoy or RM19.9m during the quarter. This was attributable to lesser number of pavements works done for expressways as a result of the enforcement of the RMCO which restricted work progress. Consequently, this resulted in a loss before tax of -RM6.6m for the segment as higher operational costs were incurred to comply with a new SOP of working under a new normal environment.

Asset Consultancy. The segment’s revenue was lower by -29.4%yoy during the quarter driven primarily due to lesser works done on projects in East Malaysia. Consequently, the segment recorded a loss before tax of -RM2.9m or a decline of >100%yoy which was primarily due to both lower revenue as well as; margin compression from higher costs incurred.

FY20-21F earnings revised. Following the lower-than-anticipated earnings, we are reducing our FY20-21F earnings by - 51.2% and -5.7% respectively to RM39.9m and RM121.5m. This is as we take into account the continued challenging operating environment as a result of the enforcement of conditional movement control order (CMCO) nationwide back in October which will result in restriction on works being carried out as well as; the increase in operating costs arising from the lower revenue recognised across the business segments.

Maintain BUY with a revised TP of RM3.06. We are maintaining our BUY recommendation on Edgenta with an revised SOP-based target price of RM3.06 (from RM3.23 previously).

While we continue to remain positive on Edgenta’s long term prospect as the company continues to operate in recessionproof business segments, we do recognise that it will be a challenging year for Edgenta due to the pandemic and this could extend into the 1QFY21 – should the CMCO continues to be enforced. That said, we opine that the drop-in earnings during the year is temporary in nature due to the movement restrictions enforcement and does not impact its future profitability. Furthermore, we are positive on the news that it has secured several new private hospitals in Malaysia under its HS segment such as: Pantai Hospital Cheras, Melaka’s Mahkota Medical Centre and Regency Specialist Hospital in Johor along with Alexandra Hospital in Singapore, Chang Gung Memorial Hospital and Micron Technology Inc. in Taiwan – which we opine will further strengthen its earnings trajectory going forward. Additionally, its fundamental remains intact with a net cash position and attractive FY21F dividend yield of 5.9%.

Source: MIDF Research - 26 Nov 2020