• Maintain Buy, with a lower DCF-derived TP of MYR1.20 from MYR1.37, c.7% yield. UEM Edgenta’s 2022 core earnings was below our and Street’s expectations due to higher operating costs, despite a robust pick-up in the infrastructure solutions division. Management remains cautiously optimistic on 2023 amid cost-inflation pressure. UEME is steadfast in adopting cost- optimisation measures and deploying tech-enabled solutions to navigate through the headwinds. Our TP incorporates 4% ESG premium as the company’s ESG score is above the country median.

• Results overview. 4Q22 core earnings came in at MYR11m (-36.5% QoQ, -57.7% YoY), bringing the full-year 2022 total to MYR54.4m, -9.1% YoY. This accounted for 83% and 89% of our and consensus’ full-year estimates. The weaker-than-expected result was mainly dragged by mounting cost pressure. A stronger fourth quarter led its full-year topline to exceed both our and consensus estimates by 5% and 8%. The infrastructure services revenue grew 15% YoY, due to a higher work order, and billable works for the maintenance of major expressways being recognised. Healthcare support, which accounted for 57% of 2022’s total revenue, declined 5% YoY – likely because of the absence of COVID-19-related revenues. Last year, UEME secured MYR1.36bn of new contracts (of which 60% were healthcare-related), representing 30% YoY increase from 2021 and slightly above the management’s MYR1.2-1.3bn target.

• Margin and outlook. The group’s core margin eased 2.2ppt YoY to 5.8% in 4Q22. This is attributed to the higher staff cost (ie implementation of minimum wages), as well as a spike in raw material prices – including bitumen, used for road maintenance and chemical products for cleaning. 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 like Singapore and Taiwan. While we are optimistic for the recovery of most pandemic-affected operations, we are similarly cognizant of the heightened operating costs.

• We cut FY23F-24F earnings by 6-4% 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 MYR1.20 after our earnings adjustment. Apart from being a key proxy to the reopening of borders, we also like the company for its commitment to a 50-80% dividend payout, as well as its current bargain valuation. UEME is currently trading at 9x 12-months forward P/E, below its 5-year mean 22x. Our TP incorporates 4% ESG premium as UEME’s ESG score stood in line with the country median.

Source: RHB Research - 1 Mar 2023