RHB Research ups UEM Edgenta's earnings forecast on better margin from infra services segment

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KUALA LUMPUR (April 9): With UEM Edgenta Bhd's performance-based contracting (PBC) approach, under its infra services segment, expected to be fully rolled out this year, RHB Research Institute Sdn Bhd has raised the company's earnings estimates by up to 6% for FY19F-20F.

"We revise slightly our earnings estimates by 5% to 6% to factor in better margin for PBC as well as contribution from the Women and Children Hospital Kuala Lumpur," said RHB Research analyst Muhammad Syafiq Mohd Salam in a note today.

Under the new contracting approach, fees are linked to performance, said Muhammad Syafiq, noting that the division ought to transform its delivery model for expressway maintenance to an outcome/performance-based from an input/resource-based variant.

Notably, for its healthcare services, the contract to service the new Women and Children Hospital Kuala Lumpur that was awarded in 2015 is worth RM1.03 billion for over 27 years. Thus, this would translate to circa RM37 million of revenue annually, Muhammad Syafiq wrote.

Also, while its infrastructure solution segment recorded lower contribution in FY18 due to delays in materialisation of consultancy works from the Pan Borneo Highway post the 14th general election (GE14), Muhammad Syafiq said the management is more optimistic on the long-term prospects of this segment.

"In addition, we are seeing new job potential from the Klang Valley Double Track (KVDT), and Sarawak Coastal Road Network projects," he added.

Maintaining a "buy" call on the stock, the research house has also raised its target price to RM3.40 from RM3.22.

"We continue to like UEM Edgenta, as we expect it to benefit from Malaysia's growing integrated facilities management (IFM) market, and the increase in government budget allocation in healthcare services," said Muhammad Syafiq.

"Additionally, we like the defensive nature of the business, and its attractive dividend yield," he added.

At 9.49am, shares of UEM Edgenta were unchanged at RM2.80, giving it a market capitalisation of RM2.33 billion.