• Keep Buy, new DCF-derived MYR1.37 TP from MYR1.46, 29% upside. Earnings were largely in line with our and Street’s expectations, as the infrastructure solutions and asset management divisions benefited from the absence of movement restriction orders. Management remains cognisant on the elevated cost outlook, as UEM Edgenta pledges to continue to adopting cost optimisation and deploying tech-enabled solutions to navigate through the headwinds.

• 9M22 results overview. UEME delivered a 3QFY22 core net profit of MYR16.6m (-3.6% QoQ, -10.9% YoY), bringing 9M22 numbers to MYR43.4m (+28% YoY). This accounted for 61% and 62% of our and consensus’ full-year 2022 estimates. We deem the results as in line, given that the group tends to record a seasonally stronger 4Q – it usually accounts for c.45-60% of full-year earnings. During 9M22, the healthcare support (HS) wing reported an 8% YoY growth, underpinned by new contract wins in Malaysia, Taiwan, and Singapore. The infrastructure solutions segment recorded a 36% YoY rise as a result of higher maintenance works performed for expressways. There was also increased consultancy works performed under the asset consultancy division following the full lifting of MCOs in April. YTD, UEME has secured MYR972m in new contracts, representing 78% of its 2022 target of MYR1.2-1.3bn.

• Margins and outlook. HS normalised PBT margins (excluding a one-off MYR12.8m impairment), which eased 4.8ppts YoY to 3.7% as a result of elevated labour costs. UEME expects to offset the negative deviation by adopting a greater degree of automation, growing its value-added services, and establishing hard service offerings in its international markets, ie Singapore and Taiwan. In terms of outlook, management expects a sequential pick-up in HS revenue in 4Q22, underpinned by replace-through- maintenance or RTM initiatives. While we are optimistic on the recovery of most pandemic-affected operations, we are similarly cognisant of the heightened operating costs.

• We trim FY22F-23F earnings by 8-4% to account for the rising cost environment for the group’s healthcare and infrastructure segments.

• Valuation. We maintain our BUY rating for UEME with a lower DCF-derived TP of MYR1.37 after our earnings adjustment. Apart from being a key proxy to the reopening of borders, we also like the group for its commitment to a 50-80% dividend payout and current bargain valuation. UEME is currently trading at 10x 12-month forward P/E, -1.8SD of its 5-year mean of 21.5x. Our TP incorporates a 0% ESG premium/discount, as the group’s ESG score stands in line with the country median. Key risks: i) Cutbacks in infrastructure activities, ii) margins compression, iii) loss of recurring income from non-renewal of facility management contracts.

Source: RHB Research - 30 Nov 2022