This article first appeared in The Edge Financial Daily on March 12, 2020

UEM Edgenta Bhd
(March 11, RM2.30)
Maintain buy with an unchanged target price of RM3.56: To recap, UEM Edgenta Bhd reported a revenue of RM2.411 billion (+10.5% year-on-year [y-o-y]) for financial year 2019 (FY19) ended Dec 31, bringing its core earnings to RM158.7 million (+2.7% y-o-y). The results were a tad above expectations due to higher revenue, thanks to the turnaround of Opus International (M) Bhd. The boost was mainly due to better consultancy (+25.1%) and infrastructure contribution (+30.3%).

Its consistent healthcare support has been the highest revenue contributor at 48% (+15% y-o-y) backed by new secured contracts from the reclustered Singapore ministry of health (MoH) hospitals. UEM Edgenta has recently started the replacement through maintenance in five Malaysia MoH hospitals and a blood bank information system at the ministry’s blood banks and hospital, including updates on availability and facilitating logistics. We feel these value-added services should aid in bringing up the company’s margins moving forward.

UEM Edgenta received a road maintenance renewal contract for the Cikampek-Palimanan Highway in Indonesia (via its partnership with Astra Group) valued at about RM182 million for a duration of three years (option of a two-year extension) earlier this year.

In Malaysia, UEM Edgenta had its first “productisation” of RAMS technology solution for Sarawak state roads. It is the company’s comprehensive software that offers cutting-edge integrated highway maintenance system together with a cloud-based system that allows efficient work order management, remote monitoring that supports real-time decision making.

In addition, the contract for upgrading works for sewerage treatment plants along the North-South Expressway is set for three years. These new contracts would be able to defend stable revenue base for UEM Edgenta in the coming years. Opus’ job focus will be on delivering its services for the Sarawak Coastal Road Network and Second Truck Road project (phases one and two) as well as Pan Borneo Highway Sarawak. For Pan Borneo Highway Sabah, Opus acts as the lead consultant. UEM Edgenta managed to set foot in Myanmar via O&M Consultancy for the Yangon Expressway, proving that UEM Edgenta is competent to be a regional player.

UEM Edgenta’s focus remains on growing its top line while ramping up its technology cost efficiency drive to improve margins. We expect organic revenue growth to follow through in FY20. The company has RM13.2 billion of work in hand (as at end-FY19).

The stock remains a good exposure to a stable earnings stream at reasonable valuations, trading at FY20-21 price-earnings ratio of 11.6-11.3 times with a dividend yield of 6-6.2%. We like UEM Edgenta for its defensive earnings profile and pivot towards healthcare support services regionally. — Hong Leong Investment Bank Research, March 11