27 September 2016 Corporate Update UEM Edgenta Berhad Expanding IFM presence to Singapore and Taiwan INVESTMENT HIGHLIGHTS Proposed acquisition of AIFS Expanding IFM business to Singapore and Taiwan A saving grace for IFM business FY17F earnings lifted by +2.1% Maintain NEUTRAL with revised TP of RM3.41 Proposed acquisition of AIFS. UEM Edgenta has entered into a sales and purchase agreement (SPA) via its wholly-owned subsidiary Edgenta Singapore for the proposed acquisition of Asia Integrated Facility Solutions Pte Ltd (AIFS) which indirectly owns 100% of UEMS Pte Ltd (UEMS) for a purchase consideration of SGD185.9m (~RM563m). The deal values UEMS at FY15 PER of 14.6x. The proposed acquisition is expected to be completed in 4Q of 2016. Expanding IFM business to Singapore and Taiwan. AIFS via UEMS is one of the leading healthcare support services (HSS) provider in both Singapore and Taiwan. It has a strong set of clientele in both countries especially the private sector healthcare operators. Post UEMS acquisition, UEM Edgenta will have immediate presence in these countries via AIFS and strengthen its position in Malaysia as AIFS is also operating in Malaysia. The acquisition which values AIFS at approximately RM563m will be fully funded by debt which would increase UEM Edgenta s gearing ratio from 0.24x to about 0.64x. A saving grace for IFM business. We are positive on the news of the acquisition as we view that the IFM business segment, which is one of UEM Edgenta s expertise is currently facing headwinds. Aside from losing about RM300m in revenue from its IFM concession business in Sabah and Sarawak, the IFM business is also struggling to secure new contracts with good margins from the local hospitals due to intense competition and slow economic activities. However, this acquisition might be the saving grace for the IFM business. Looking at the past three years pro-forma accounts of UEMS appended in the announcement, the acquisition could potentially contribute about RM260m in revenue. Additionally, UEMS has also recently acquired in July 2016, UESC which is another HSS subsidiary in Taiwan with a potential annual contribution of RM35m. Hence, we think this acquisition will not only help to offset the loss of its Sabah and Sarawak concession but also gain more business due to a better set of private healthcare sector clientele exposure brought over by UEMS. Moreover, the positive outlook and growing demand for healthcare services will definitely bode well for the IFM business. RETURN STATS Maintain NEUTRAL Revised Target Price (TP): RM3.41 Price (26 September 2016) Target Price (Previously RM3.23) RM3.25 RM3.41 Expected Share Price Return +4.9% Expected Dividend Yield +3.1% Expected Total Return +8.0% STOCK INFO KLCI 1,669.5 Bursa / Bloomberg Board / Sector Syariah Compliant 1368 / UEME MK Main / Trading Services Yes Issued shares (mil) 831.62 Par Value (RM) 1.00 Market cap. (RM m) 2,702.78 Price over NA 2.10 52-wk price Range RM3.04-3.98 Beta (against KLCI) 1.10 3-mth Avg Daily Vol 0.30m 3-mth Avg Daily Value Major Shareholders (%) RM1.06m UEM Group Berhad 69.14 CIMB Principal Asset Mgmt 4.77 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 Earnings forecasts. We made no changes to our FY16F earnings forecasts as the acquisition is expected to only be completed in the 4Q of 2016. However, we have incorporated the potential contribution from the acquisition from FY17F onwards which saw our FY17F earnings lifted by 2.1% to RM222.6m from RM218.1m previously. This is in line with the projected EPS growth by the company post-acquisition of AIFS. Recommendation. We are maintaining our NEUTRAL call with a revised TP SOP-based of RM3.41 (from RM3.23 previously) on UEM Edgenta, post-acquisition announcement and earnings revision. Despite being positive on the news, we remain wary on the increasingly challenging operating environment faced by Opus Group, its main revenue contributor. That said, we take comfort in the fact that it continues to possess robust balance sheet with a strong net cash position which we opine will enable it to be more flexible in terms of engaging in potential new opportunities such as acquisitions that could assist in contributing to its revenue. We believe the potential re-rating catalyst for UEM Edgenta would be in the form of: (i) significantly better quarterly earnings performance, (ii) recovery in margins, and (iii) winning meaningful-sized contracts that could contribute significantly to revenue and earnings. Table 1: SOP-based valuation Valuation basis TP(RM'm) TP/share (RM) Concession IFM DCF @ WACC of 8.46% 480.4 0.58 Property DCF @ WACC of 8.46% 27.4 0.03 PROPEL DCF @ WACC 8.46% 803.6 0.97 Opus 15x FY16 earnings 972.2 1.17 Add: 40% asssociate stake in Sabah and Sarawak DCF @ WACC of 8.46% 117.2 0.14 Add/(less): FY16 Net cash/(debt) 434.8 0.52 SOP 2,835.7 3.41 Source: MIDFR Table 2: 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
3 INVESTMENT STATISTICS FYE Dec (RMm) FY2012 FY2013 FY2014 FY2015 FY2016F FY2017F Revenue 856.8 2,699.7 3,066.3 3,123.0 2,890.7 3,485.5 Cost of sales (592.3) (1,816.6) (2,108.0) (2,101.3) (2,196.7) (2,508.1) Gross profit 264.5 883.1 958.4 1,021.8 694.0 977.4 Finance costs (8.7) (7.6) (14.3) (16.6) - - Profit before tax 198.6 317.2 301.5 305.4 220.2 412.2 Income tax expense (15.9) (29.2) (82.6) (95.9) (55.1) (103.1) Net Profit (RM m) 108.5 190.4 179.4 209.5 118.9 222.6 PATAMI (RM'm) na 190.4 204.3 191.2 118.9 222.6 PBT Margin (%) 23.2 11.7 9.8 9.8 7.6 11.8 Net Profit Margin (%) 12.2 11.4 9.5 6.7 4.1 6.4 Diluted EPS (sen) 17.9 17.6 22.1 23.5 14.3 26.8 Diluted EPS Growth (%) -41.5-1.6 25.1 6.6-39.1 87.2 PER (x) 18.1 18.4 14.7 13.8 22.7 12.1 Net Dividend (sen) 10.0 9.8 23.0 15.0 10.0 18.7 Dividend yield (%) 3.1 3.0 7.1 4.6 3.1 5.8 Tax rate (%) 8.0 9.2 27.4 31.4 25.0 25.0 Source: Company, Forecasts by MIDFR DAILY PRICE CHART Noor Athila Mohd Razali noor.athila@midf.com.my 03-2772 1679
4 APPENDIX 1 Business information on Asia Integrated Facility Solutions (AIFS) The AIFS group provides integrated facilities management and support services to the healthcare, manufacturing, commercial and industrial, and educational sector. Its integrated facilities management and support services include the following: Environmental Services (Soft FM Service) Housekeeping Planning and management services that ensure cleanliness and safety and visibly impact the facility s aesthetics Portering Moving patients, specimens, equipment and document within and to other hospitals in an optimal and efficient manner Stone care services Maintaining a range of natural stone and ceramic surfaces, including floor surfaces, countertops, tables and other areas at peak polish levels Grounds and landscape Comprehensive landscape planning and care for enhanced facility s image and beautification External façade maintenance Helps client s facility to achieve an immaculate external image and overcome the effects of weathering and pollution Pest control Integrated pest management service Facilities Engineering Services and Maintenance (Hard FM Service) Facilities engineering services Planned and reactive maintenance designed to extend asset life, reduce costs and promote service responsiveness Engineering asset management Provides a systematic process of maintaining, upgrading and operating physical assets cost effectively Indoor air quality and duct cleaning Provides indoor air quality program to achieve a healthy indoor work environment and meet regulatory compliances Property Management Services and Others Property management services Facilities, management and maintenance services, managing agent services, fire safety management services and project management and consultancy services Condition appraisal Provides critical information to develop facility s condition database that can be used for purposes such as: asset valuation, prepare long term asset investment plans, achieve a balance between capital and maintenance expenditure and benchmark property condition Training and development Specialise in offering technical training and certification, consultancy and audit and standard development services for facility management, environmental and hygiene management facility management, infection control management and hospitality (accommodation) management.
5 MIDF RESEARCH is part of MIDF Amanah Investment Bank Berhad (23878 - 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.