• Upgrade to BUY from Neutral, new MYR1.46 TP from MYR1.70, 38% upside, c.4.8% FY22F yield. UEM Edgenta should see a pick-up in 2H22 topline growth, underpinned by a seasonally stronger 4Q and its robust balance sheet (low gearing ratio of 0.1x) that should support its dividend payout policy of 50-80% moving forward. While having cost escalation clauses in its contracts, management remains steadfast on optimising costs by incorporating technology-based solutions to increase productivity. This report marks the transfer of coverage to Oong Chun Sung.

• Healthcare. UEME’s commercial orderbook from the healthcare segment inched up to 44% of the total healthcare orderbook vs pre-pandemic’s 20- 39%. Notwithstanding its ability to continue clinch new commercial contracts from overseas, the group is committed towards becoming a tech- enabled solutions provider in the healthcare service industry by 2025 via various offerings: i) Biomedical engineering maintenance services or BEMS, ii) implementing mobile on-site testing facilities or MOSTFacs for COVID-19 screening, and iii) initiating a replace through maintenance or RTM programme for the Health Ministry’s medical equipment. Moving forward, we expect healthcare to continue delivering stellar growth, underpinned by the return of patient visits to hospitals and its pioneering tech-enabled solutions to drive healthcare digitalisation while it moves up the value chain under its Edgenta of the Future 2025 or EoTF 2025 strategy.

• Seasonally stronger 2H. Following the full reopening of the economy, we expect UEME to take full advantage of higher road maintenance and pavement works from PLUS Expressways on higher road traffic volumes. It expects stronger seasonality in 4Q, accounting for 30% of full-year revenue, as customers will attempt to utilise their annual budgets towards the end of the year. UEME has secured 61% of its full-year orderbook target of MYR1.2-1.3bn. Its orderbook stood at MYR10.5bn as at June and should provide the group with earnings visibility for the next 4-5 years.

• Cost. Despite having variation of price or VOP clauses in its contracts, UEME still faces implementation constraints, as not all clients are open to accepting spikes in costs. To cope with that, it is resorting to bundling services/procurements, increasing automation and mechanisation efforts to optimise resource utilisation, and reducing its reliance on manpower.

• Earnings adjustments and valuation. We trim our FY22F-23F earnings by 6% and 1% in view of the potential cost pressures weighing on its margins. We upgrade UEME to BUY with a new MYR1.46 TP with a 0% ESG premium/discount to our intrinsic value. Apart from being a key proxy from reopening borders, we see bargain valuations emerging, as UEME is currently trading at 11x forward P/E, 1.2SD below its historical mean.

Source: RHB Research - 31 Oct 2022