This article first appeared in The Edge Financial Daily on April 10, 2019
UEM Edgenta Bhd
(April 9, RM2.79)
Reiterate buy with a revised target price of RM3.40: We continue to like UEM Edgenta Bhd, as we expect it to benefit from Malaysia’s growing integrated facility management market, and the increase in government budget allocation in healthcare service. Additionally, we like the defensive nature of the business, and its attractive dividend yield. We are one of the only three brokers covering this stock.
We believe the healthcare service segment will continue to grow this year, as the group should start servicing the new Women and Children Hospital Kuala Lumpur. The contract was awarded back in 2015, and it is worth RM1.03 billion over 27 years. This would translate into about RM37 million of revenue per annum. The hospital reportedly received its first patient on Feb 25. In addition, it is reported that the government has increased its budget allocation for public healthcare spending to RM28.7 billion in 2019 (+7.8% year-on-year). We believe this will bode well for the group, given its expertise in healthcare service.
The performance-based contracting (PBC) should be fully rolled out this year. The framework represents a shift in approach and sophistication, as well as the pursuit of technological deployment in delivering maintenance service. Under the new contracting approach, fees are linked to performance. Basically, the division ought to transform its delivery model for expressway maintenance to an outcome/performance-based from an input/resource-based variant. As such, margins are expected to improve through more efficient and cost-effective service deliveries.
Infrastructure solution segment recorded lower contribution in financial year 2018 due to delays in materialisation of consultancy work from the Pan Borneo Highway post 14th general election. Having said that, management is more optimistic about the long-term prospects of this segment on the government’s commitment to implement the Pan Borneo Highway. In addition, we see new job potentials from the Klang Valley Double Track (KVDT), and Sarawak Coastal Road Network projects.
We revise slightly our earnings estimates by 5%-6% to factor in better margin for PBC as well as contribution from the Women and Children Hospital Kuala Lumpur. — RHB Research Institute, April 9