• U/G to NEUTRAL from Sell, higher MYR0.89 TP (DCF) from MYR0.84, 1% downside. 1Q24 results were in line at 27% and 21% of our and Street’s estimates. Topline registered 7% YoY growth, aided by ongoing contract recognitions from Singapore and Taiwan, while core margin contracted 0.5ppts – dragged by the infrastructure solutions (IS) segment. We upgrade our UEM Edgenta call on its sequential bottomline turnaround but remain cautious on cost pressure risks, especially diesel subsidy rationalisation.

• Results overview. 1Q24 core profit doubled QoQ to MYR8.9m (4Q23: MYR4.1m) thanks to improvements in operating efficiency from the healthcare support (HS) division offset against a seasonally weaker quarter from the IS segment. HS revenue grew 13% YoY, aided by recognition of new projects won last year, eg Cyberjaya Hospital and Woodlands Health Campus. Property & facility solutions (PFS) spiked 71% YoY on higher variation orders from the United Arab Emirates, and consolidation of newly acquired entities MEEM Facilities Management Co and Kaizen Group (both 60% owned). The IS’ wing’s revenue contracted 13% YoY, no thanks to lesser maintenance work performed for expressways. UEME has secured MYR1.7bn worth of new contracts in 1Q24 (1Q23: MYR651m), bringing its outstanding orderbook to MYR9.5bn vs MYR9.3bn as at Dec 2023, which could provide three years of earnings visibility, based on our estimates.

• Margins and outlook. 1Q24 core margin contracted by 0.5ppts YoY to 1.3% as a result of heightened cost pressures, eg higher staff costs and spikes in raw material prices. Moving forward, we expect margins compression risks to persist in view of the relatively sticky cost nature of labour. Furthermore, the implementation of the diesel subsidy rationalisation (once finalised) could present a further downside risk, considering the pricing differential of 55% between subsidised and unsubsidised rates.

• Earnings estimate and valuation. We raise our 2024F-2025F earnings by 11% and 9%, taking into account higher-margin job recognitions from overseas that are offset against margins compression from the PFS segment (mainly labour costs). Our DCF-derived TP is now higher (MYR0.89), which implies -0.4SD below the 5-year mean. Despite earnings picking up sequentially, we remain cautious on the potential cost pressures arising from the rationalisation of the Government’s diesel subsidy programme, which could potentially erode the IS’ wing’s margins. In the meantime, cost pass- throughs appear challenging, given that the bulk of the orderbook is concession based (c.70-80%; the rest are commercial) – we do not expect profitability to recover to pre-pandemic levels (c.6-7%). Our TP incorporates an 8% ESG premium, as the 3.4 ESG score is above the country median.

Source: RHB Research - 31 May 2024