• Maintain BUY with a higher DCF-derived MYR0.94 TP from MYR0.92, 50% upside. UEM Edgenta reported a 3Q24 core profit of MYR14.8m, bringing its 9M24 numbers to MYR36m – accounting for 91% of our estimate. Results were above expectation, aided by ongoing contracts recognition from Singapore and Taiwan (under the healthcare division) and higher work orders from the infrastructure segment. UEME is currently trading at 2SD below its 2-year historical mean of 17x.

• Results overview. 3Q24 core profit recovered to MYR14.8m from MYR5.4m a year ago, thanks to higher revenue recognition from ongoing commercial contracts from the healthcare service (HS) division in Singapore and Taiwan, higher work order from the infrastructure services (IS) unit, and contributions from the property & facility solutions (PFS) segment – the latter was a result of the consolidation of newly acquired entities MEEM Facility Management and Kaizen Group (both 60% owned). UEME has secured MYR277m worth of new contracts in 3Q24, with total outstanding orderbook to MYR9bn, which is expected to provide 3-year earnings visibility for the group based on our estimates.

• Margins and outlook. 3Q24 core profit expanded slightly by 0.2ppts QoQ to 1.9% – mainly driven by better operating efficiencies from the IS division, offset against heightened cost pressures from the PFS and HS segments. Moving forward, UEME is expected to post a stronger 4Q24, as the IS division should see higher work orders – this is because, historically, clients typically utilise their remaining unutilised budgets towards 4Q. Meanwhile, the implementation of the new national minimum wage or MYR1,700/month could present a margins compression risk, but we think the risk is manageable – this is because UEME has cost escalation clauses under its commercial contracts with customers.

• Earnings estimates and valuation. We raised our 2024F-2026F earnings by 27%, 47%, and 43% as we tweak our revenue assumptions to account for higher work orders for the PFS segment. Post earnings adjustments, our DCF-derived TP is raised to MYR0.94, which represents 0.7SD below the historical mean of 17x. Our BUY rating is premised on undemanding valuations and UEME’s initiatives that placed greater emphasis towards commercial tenders vis-à-vis concessions-based ones given their lower- margin nature. Our TP incorporates an 8% ESG premium, as its 3.4 ESG score is above the 3.0 country median.

• Key risks: Termination of contracts, higher-than-expected operating costs, and cutbacks in infrastructure spending.

Source: RHB Securities Research - 27 Nov 2024