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Friday, November 25, 2016

UEM Edgenta (BUY) - Encouraging recovery signs

Author: HLInvest   |   Publish date: Fri, 25 Nov 2016, 09:59 AM 


Results

  • Edgenta reported 3QFY16 results with revenue of RM725m (+4% QoQ, -1% YoY) and core earnings of RM51m (-15% QoQ, -27% YoY).
  • Cumulative 9M core earnings summed to RM132m (-14% YoY) which excludes RM68m in goodwill impairment from Opus Stewart Weir (OSW), Australia and a Canadian JV.

Deviation

  • 9M core earnings made up 91% of our full year forecast (81% of consensus) which is above expectations.

Dividends

  • None declared. Usually in 4Q.

Highlights

  • Opus recovering. While Opus (asset consultancy) saw slightly higher revenue QoQ (+6%), PBT recovered strongly by +91%. This was aided by QoQ PBT margin expansion from 5.3% to 9.6% as its cost rationalisation (i.e. headcount) measures have been paying off coupled with a stronger NZD. However, on a cumulative 9M basis, PBT was still down -35% YoY, largely dragged by 1H numbers. While the improving signs are encouraging, management continues to keep a close eye on Canada and Australia where the environment remains challenging.
  • PROPEL hit by timing gap. PROPEL (infra maintenance) saw 9M revenue decline by -11% YoY due to the timing gap between completion of older jobs (NSE 4 th lane widening) and the commencement of newer ones. PBT margin also contracted from 13.9% to 11% owing to this.
  • IFM improves. Integrated Facilities Management (IFM) witnessed QoQ revenue growth of 7% but PBT margins recovered strongly from 5.8% to 16.8%. The strong +209% QoQ improvement in PBT was due to a low base last quarter resulting from high maintenance of its bio medical equipment. Nonetheless, 9M PBT for IFM still fell by -38% YoY given the loss of the East Malaysia hospital concession which was partially buffered by the acquisition of KFM.

Risks

  • Continued slowdown in Australia and Canada.

Forecasts

  • We raise FY16-18 earnings by 22%, 9% and 6% respectively after imputing stronger recovery traction at Opus along with a stronger NZD-MYR assumption.

Rating

Upgrade to BUY, TP: RM3.85
  • With the encouraging signs of improvement at Opus, we are now in a more comfortable position to upgrade our rating on Edgenta to a BUY. The eventual earnings accretion from UEMS is an added catalyst which we have yet to factor in.

Valuation

  • Following our earnings upgrade, our SOP based TP is raised from RM3.67 to RM3.85. This implies FY16-17 P/E of 18.2x and 16.4x respectively.
Source: Hong Leong Investment Bank Research - 25 Nov 2016

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