• Still BUY, lower MYR1.18 TP (DCF) from MYR1.20, 17% upside, c.6% yield. UEM Edgenta’s 1Q23 core earnings of MYR11.2m came in at 14% of our and Street’s expectations. Margins eased by 0.3ppts as a result of cost escalation across its key operating segments, despite a robust pick-up in revenue growth. UEME is trading at -1.5SD below its 5-year historical mean. Management expects the integration of Edgenta NXT to optimise its energy utilisation, resulting in better operating efficiency. Our TP incorporates an 8% ESG premium as UEME’s ESG score is above the country median.

• Results overview. 1Q23 core earnings came in at MYR11m, accounting for 14% of our and consensus’ full-year estimates. We deem the results as within expectations due to seasonal factors, as higher work orders will typically be billed towards the 4Q (1H accounted for <50% of pre-pandemic full-year revenue). Revenue from the property and facility solutions (PFS) segment grew 52% YoY from higher contract wins last year (UEME’s proprietary digital ecosystem Asseto was shortlisted by KLCC last year to manage the Petronas Twin Towers). Healthcare support (HS) revenue was weaker (-1% YoY) due to the absence of COVID-19-related contracts during the quarter. The group has secured MYR651m of new contracts so far (55% from IFS), representing 50% of the total contracts secured in 2022.

• Margin and outlook. Core margins fell 0.3ppts YoY to 1.8% in 1Q23 on higher staff costs as well as a spike in raw material prices (chemical products used for cleaning, as well as a YoY surge in bitumen prices – used for road maintenance). The group has integrated Asseto into its PFS segment (HS is still under its pilot phase), as it hopes the automated solutions will help offset the negative impact from the escalating cost environment.

• We cut FY23F-24F earnings by 9-12% to account for the rising cost environment for its healthcare and infrastructure segments.

• Valuation. Still BUY with a lower DCF-derived TP of MYR1.18. We like the company for its commitment to a 50-80% dividend payout, its position as a differentiated service provider with a commendable clientele base, and for its ESG enabler solutions in driving Green Building Index (GBI)-certified accreditation for its clients. Our TP represents 13x FY23 forward P/E, at 1.3SD below its 5-year mean of 22x. We incorporate an 8% ESG premium (from 4% previously) to our TP in line with our new ESG framework.

• ESG framework update. As there is now greater focus on the E pillar due to critical climate change issues, we have tweaked our ESG weightage. Henceforth, we assign a weightage of 50% to the E pillar, followed by 25% each to the S and G pillars. Further details are in our 2 May thematic research note titled Envisioning a Better Future.

Source: RHB Research - 31 May 2023