UEM Edgenta Bhd
(March 6, RM2.92)
Maintain buy with a target price (TP) of RM3.28: The healthcare services (HS) segment showed encouraging improvement in terms of both revenue and profit after tax (PAT) registering high single-digit increase of 7.9% and 6.8% year-over-year respectively. This is coupled with net margin expansion for its healthcare concession business to 9.5% (from 8.2% in FY17) despite the concession rates being relatively unchanged for the past few agreements. This is due to the company’s continuous effort in reducing costs associated with operating the concession business. Meanwhile, the commercial healthcare segment remains robust despite registering a decline in margin to 8.5% (from 9.6% in FY17) due to intense competition in Singapore. Healthcare services contribute about 45% to both Edgenta’s revenue and PAT.
We understand from the management that it is due to renegotiate with the health ministry on among others, its concession rate in the 2HFY19. While the negotiation might signal a potential upward revision in its concession rate, however the management remains conservative as it reflects on the government’s current financial standing. That said, going forward the segment will continue to be driven by the ongoing cost optimisation initiatives as well as; potential new contracts to be secured in the commercial healthcare segment. This will ensure the growth of both the top line as well as the bottom line for the segment.
The management revealed that it has finally fully converted its input-based contract with PLUS Malaysia Bhd (PLUS) to a performance-based contract (PBC) which began in January 2019. This entails an improvement in maintenance deliverables which would translate into cost savings for both Edgenta and PLUS. The pilot phase of PBC begun in August 2018. With the full-year implementation of PBC, we opine that further improvement in terms of margin which incorporates the full impact of the implementation of PBC will be more visible from FY19 onwards. As of FY18, the margin for the infra segment was recorded at 8.6% which is an increase from FY17’s margin of 7%.
The company recently secured several new contracts for facilities management, township management and energy performance contracting services for CIMB buildings, TRX, Medini Iskandar and the German-Malaysian Institute. Despite the segment’s contribution to Edgenta’s top line and bottom line is only approximately 10% at this juncture, we opine that this segment has a big growth potential given the increasing emphasis on environmental issues such as energy savings and reducing carbon emissions. In addition, the growing demand for technologically-driven solutions will also drive this segment going forward. Currently, Edgenta continues to be at the forefront in providing differentiated and technologically-driven solutions to its clients.
Edgenta’s current work-in-hand value is estimated at approximately RM13.4 billion as of Dec 31, 2018 with various recognition periods. The breakdown consists of 29% from the healthcare services, 65% from the infrastructure services while the remaining 3.6% stem from consultancy.
We make no changes to our FY19-20F (forecast) earnings estimates as we have previously raised our earnings estimates during the 4QFY18 earnings report.
We are reiterating our “buy” recommendation on UEM Edgenta with an unchanged sum-of-parts -based TP of RM3.28 per share. We remain sanguine on Edgenta’s growth prospect going forward to be led by all its business segments with potential margin expansions.
Furthermore, we note that Edgenta’s share price has been on the increasing trend since September 2018. However, we opine that it remains undervalued as it is currently trading at 16.1 times which is below its three-year average price-earnings ratio of 18 times despite Edgenta remaining as the only company that provides total asset solutions in Malaysia be it listed or non-listed. It is also a company with a solid growth prospect and stable earnings as about 70% of its revenue is recurring in nature due to its concession business. In addition, its balance sheet remains strong with a net cash position of RM70.1 million as of end-2018 and an attractive expected dividend yield of 5.2% for FY19F and 5.7% in FY20F. — MIDF Research, March 6