• Stay BUY, new MYR1.12 TP (DCF) from MYR1.18, c.5% yield. UEM Edgenta posted a 2Q23 core net profit of MYR11.5m, taking 1H23 numbers to 31% and 33% of our and Street’s expectations, ie in line with seasonality expectations (higher work orders are typically billed towards 2H). Core margins are largely stable at 1.7%, notwithstanding the cost inflation impact thanks to technology deployment in automating work orders. It trades at -1.6SD below its 5-year historical mean of 22x. Our TP incorporates an 8% ESG premium, as its ESG score is above the 3.0 country median.

• Results overview. 1H23 core earnings of MYR22.8m accounted for 31% and 33% of our and consensus’ full-year estimates. We deem this as within expectations due to seasonality, as higher work orders are typically billed towards 2H. Revenue from the healthcare support (HS), and property and facility solutions (PFS) segments were higher by 16% YoY in 2Q23 thanks to the healthy contract won during the previous quarter. The infrastructure solution or IS division’s revenue grew 6.7% YoY thanks to higher pavement works performed for expressways. To date, UEME has secured MYR922m in new contracts – of which 70% were contributed by HS – and achieved 75% of the group’s total contracts secured in 2022. Its outstanding orderbook stood at MYR9.6bn, which provides UEME earnings visibility of 3.6 years.

• Margins and outlook. Core margin held up steadily (QoQ and YoY) at 1.7% in 2Q23 thanks to the improvements in operating efficiency. This is as the group continued to deploy its proprietary tech solutions to mitigate against cost pressure, ie higher staff costs and spikes in raw material prices (eg chemical products used for cleaning) and a YoY surge in bitumen (used for road maintenance) prices. We still like UEME for its: i) Commitment to a 50-80% dividend payout, ii) position as a differentiated service provider with a commendable clientele base, and iii) ESG enabler solutions in driving Green Building Index (GBI)-certified accreditation for its clients. The group managed 19 GBI and Leadership in Energy & Environmental Design or LEED-certified buildings as at 2022.

• We cut FY23F-24F earnings by 14-7% to account for the rising cost environment for its HS and PFS segments.

• Valuation. Maintain BUY with a lower DCF-derived TP of MYR1.12. Our TP represent 12x FY24 forward P/E or 1.4SD below its 5-year mean of 22x. We incorporate an 8% ESG premium – up 4% previously – into our TP.

• Key risks: i) Cutbacks in infrastructure activities, ii) margins compression, and iii) loss of recurring income from non-renewal of facility management contracts.

Source: RHB Securities Research - 29 Aug 2023