UEM Edgenta Berhad New ventures to sustain growth

Transcription

1 05 May 2016 Corporate Update UEM Edgenta Berhad New ventures to sustain growth INVESTMENT HIGHLIGHTS Post-M&A so far Sustaining the current business Plugging in the leakage Venturing into township management services FY16 Outlook Maintain NEUTRAL with revised TP of RM3.64 Post-M&A so far. Recall that pursuant to the merger and acquisition of Opus Group (Opus) & Projek Penyelengaraan Lebuhraya (PROPEL), Edgenta s corporate structure is now divided into 3 main service divisions which are Asset Consultancy (AC), Infrastructure Services (IS) and Integrated Facilities Management (IFM). The property development division is now a pre-merger legacy and a non-core division of the company. In FY15, the company derived its main source of revenue from AC that was mainly driven by its New Zealand operations underpinned by strong performance in major transportation works such as the Waikato Expressway. AC contributed 49% to Edgenta s total revenue, followed by IS at 28% and IFM at 21%. In terms of segmental revenue in FY15, IS experienced a 17% increase due to higher work progress and certifications for the North-South Expressway (NSE) fourth lane widening and the Bayan Lepas Expressway project. On the other hand, AC recorded a 5% decrease in revenue due to overall weak economic condition in Australia coupled with the decline in oil and gas prices affecting project commencement in Canada. IFM also registered a decrease in revenue albeit by only 2% due to reduced contribution from its Sarawak operations. Sustaining the current business. Arising from the challenging operating environment faced by Opus, we understand that the company is currently looking into diversifying their revenue base by tapping into niche segments within their existing service divisions. The new areas that Edgenta is looking into are: (i) energy services, (ii) facilities services, (iii) property services, and (iv) environmental and material testing services. The company will be tapping into its existing clientele list which ranges from the Ministry of Health s government hospital to PLUS Expressway as a starting point. However, the company expects the contribution to be quite minimal in the medium term as the company builds its expertise and reputation in the aforementioned segments. RETURN STATS Maintain NEUTRAL Revised Target Price (TP): RM3.64 Price (4 May 2016) Target Price (previously RM3.35) RM3.72 RM3.64 Expected Share Price Return -2.1% Expected Dividend Yield +4.9% Expected Total Return +2.8% STOCK INFO KLCI 1, Bursa / Bloomberg Board / Sector Syariah Compliant 1368 / UEME MK Main / Trading Services Yes Issued shares (mil) Par Value (RM) 1.00 Market cap. (RM m) 3, Price over NA wk price Range RM Beta (against KLCI) mth Avg Daily Vol 0.88m 3-mth Avg Daily Value Major Shareholders (%) RM3.20m UEM Group Berhad CIMB Principal Asset Mgmt 4.65 Public Small Cap Fund 1.89 EPF 1.70 MIDF RESEARCH is a unit of MIDF AMANAH INVESTMENT BANK Kindly refer to the last page of this publication for important disclosures

2 2 Plugging in the leakage. From FY16 onwards, contribution from East Malaysia s IFM concession will be reduced by RM300m. Having said that, the company has recently acquired KFM Holdings, a key player in the IFM sector with an order book value of more than RM700m. Besides IFM services, KFM Holdings is involved in the provision of green technology and sustainability services in both Malaysia and the United Arab Emirates (UAE). The rationale for the acquisition is to provide UEM Edgenta with the opportunity to: (i) consolidate a key market player, (ii) acquire complementary skill sets, (iii) increase its market share in the IFM sector, and (iv) expand its presence into the UAE. Recall that this acquisition was completed with a consideration of RM128m, satisfied with the combination of: (i) an upfront cash payment of RM36m, (ii) a deferred cash payment of RM20m, (iii) an incremental value payment of RM16m, and (iv) an issuance of 18.13m new ordinary shares of RM0.25 each in UEM Edgenta at an issuance price of RM3.09 per share. As a result, the share base of UEM Edgenta has increased from 813m shares to 831.6m shares. Despite the enlarged share base, we view that the acquisition as earnings accretive with its Profit After Tax and Non-Controlling Interest (PATANCI) and earnings per share (EPS) for FY2016 are expected to increase by 4.8% and 2.6% respectively. We believe this is one of the measures to plug in the leakage resulting from the reduced contribution from East Malaysian concessions. Venturing into township management services. In November 2015, Edgenta entered into a joint-venture (JV) with UEM Sunrise to create UEM Sunrise Edgenta TMS (UEMSET). Under this JV, Edgenta has the first right of refusal to undertake the provision of property and township management services for projects under UEM Sunrise. Later in January 2016, a JV was formed by UEMSET with Medini Iskandar s Township Management Services. UEMSET s first project under this JV will be the township management for Iskandar Puteri and Medini Iskandar townships which are located strategically in Johor s Iskandar Malaysia region. Medini Iskandar envisions itself to become a smart city with initiatives that feature smart buildings, integrated operations centres, an official Medini online portal as well as smart mobility in the form of electric vehicles and water taxies. For a start, Medini Iskandar plans to build their first two towers worth RM230 million, which is expected to be completed by Essentially, Edgenta will be providing: (i) basic utilities services such as waste collection, basic public facilities and road cleaning, (ii) IFM services that cover security, waste, landscape and property management, and (iii) integrated community-focused services that include remote monitoring, auxiliary police, performance and environmental management under the said JVs. Chart 1: Corporate structure of UEM Edgenta Source: Company, MIDFR

3 3 Chart 2: JV structure of the property services division UEM Edgenta UEM Sunrise Medini Iskandar 100% Edgenta Township Management Services 100% 70% 30% UEM Sunrise Edgenta TMS 70% Township Management Services 30% Edgenta TMS Source: Company, MIDFR Figure 1: Strategic location of Medini Iskandar Source: Company, MIDFR

4 FY16 outlook. In the past 3 years, gross margins have been above 30% and the management expects to sustain this throughout FY16 by leveraging on the effective delivery of the venture into new service divisions while protecting its core business offerings. In addition, PBT margins have been hovering about 9-10% and we think this will likely be the case for FY16 with no improvement foreseen given the current challenging operating environment. Management also disclosed that the capital expenditures for FY16 and FY17 would be about RM100m respectively and will be allocated mainly for maintenance of property, plant and equipment. Additionally, we think the dividend yield is still decent at about 5.1%. Having said that, management believes that AC will recover this year despite the Australian outlook being hampered by mining slowdown as the worst could possibly has ended with the order book percentage recovering from 25% to 33%. IS is expected to do well in FY16 as growth will be mainly driven by work orders and the recently awarded contract for Selangor Zone III State Road Maintenance. We also view that the reduced contribution from East Malaysia s IFM services would not severely impact its earnings as the new acquisition of KFM as well as the recurring earnings of IS and IFM should cushion the uncertainty of the contribution from AC. Earnings forecasts. We are re-introducing our new FY16 and FY17F earnings forecasts at RM217.9m and RM257.5m respectively. The figures represent a year-on-year earnings growth of 4% and 18% respectively as we are expecting operating environment to recover in FY17 coupled with new contributions coming from its new ventures. Recommendation. We are maintaining our NEUTRAL call with a revised TP of RM3.64 on UEM Edgenta pending its 1QFY16 results announcement scheduled to be released on 27 May Despite the current challenging operating environment, we think that the recurring earnings coming from all divisions should sustain the bottomline this year. In addition, the new ventures as well as a healthy order book would bode well for the company going forward. Table 1: SOP-based valuation Valuation basis TP(RM'm) TP/share (RM) Concession IFM WACC of 8.46% Property WACC of 8.46% PROPEL WACC 8.46% Opus 15x FY16 earnings 1, Add: 40% associate stake in Sabah and Sarawak WACC of 8.46% Add/(less): FY16 Net cash/(debt) SOP 3, Source: MIDFR Table 2: Key earnings assumptions FY16F FY17F IFM Concession 2% growth 2% growth Property RM50m RM50m PROPEL 16% growth 16% growth Opus 13% growth 13% growth Source: MIDFR 4

5 5 Table 3: WACC Parameters Parameters Risk free rate 4.0% Market Risk Premium 6.0% Beta (Adjusted 2-year beta) 1.00 Cost of Equity 10.0% Cost of debt 5.0% Tax rate 25.0% WACC 8.46% Source: MIDFR INVESTMENT STATISTICS FYE Dec (RMm) FY2012 FY2013 FY2014 FY2015 FY2016F FY2017F Revenue , , , , ,771.4 Cost of sales (592.3) (1,816.6) (2,108.0) (2,101.3) (2,337.9) (2,682.2) Gross profit , ,089.2 Finance costs (8.7) (7.6) (14.3) (16.6) - - Profit before tax Income tax expense (15.9) (29.2) (82.6) (95.9) (100.9) (119.2) Net Profit (RM m) PBT Margin (%) Net Profit Margin (%) Diluted EPS (sen) Diluted EPS Growth (%) PER (x) Net Dividend (sen) Dividend yield (%) Tax rate (%) Source: Company, Forecasts by MIDFR DAILY PRICE CHART Noor Athila Mohd Razali Adam Mohamed Rahim noor.athila@midf.com.my

6 6 MIDF RESEARCH is part of MIDF Amanah Investment Bank Berhad ( X). (Bank Pelaburan) (A Participating Organisation of Bursa Malaysia Securities Berhad) DISCLOSURES AND DISCLAIMER This report has been prepared by MIDF AMANAH INVESTMENT BANK BERHAD (23878-X). It is for distribution only under such circumstances as may be permitted by applicable law. Readers should be fully aware that this report is for information purposes only. The opinions contained in this report are based on information obtained or derived from sources that we believe are reliable. MIDF AMANAH INVESTMENT BANK BERHAD makes no representation or warranty, expressed or implied, as to the accuracy, completeness or reliability of the information contained therein and it should not be relied upon as such. This report is not, and should not be construed as, an offer to buy or sell any securities or other financial instruments. The analysis contained herein is based on numerous assumptions. Different assumptions could result in materially different results. All opinions and estimates are subject to change without notice. The research analysts will initiate, update and cease coverage solely at the discretion of MIDF AMANAH INVESTMENT BANK BERHAD. The directors, employees and representatives of MIDF AMANAH INVESTMENT BANK BERHAD may have interest in any of the securities mentioned and may benefit from the information herein. Members of the MIDF Group and their affiliates may provide services to any company and affiliates of such companies whose securities are mentioned herein This document may not be reproduced, distributed or published in any form or for any purpose. MIDF AMANAH INVESTMENT BANK : GUIDE TO RECOMMENDATIONS STOCK RECOMMENDATIONS BUY TRADING BUY NEUTRAL Total return is expected to be >15% over the next 12 months. Stock price is expected to rise by >15% within 3-months after a Trading Buy rating has been assigned due to positive newsflow. Total return is expected to be between -15% and +15% over the next 12 months. SELL TRADING SELL Total return is expected to be <15% over the next 12 months. Stock price is expected to fall by >15% within 3-months after a Trading Sell rating has been assigned due to negative newsflow. SECTOR RECOMMENDATIONS POSITIVE NEUTRAL NEGATIVE The sector is expected to outperform the overall market over the next 12 months. The sector is to perform in line with the overall market over the next 12 months. The sector is expected to underperform the overall market over the next 12 months.