UEM Edgenta’s MRT job win not entirely surprising

UEM Edgenta Bhd (Aug 15, RM3.62)

Maintain hold with an unchanged target price (TP) of RM3.87: UEM Edgenta Bhd’s (Edgenta) wholly-owned subsidiary, Edgenta Propel Bhd (Propel), has been awarded an RM87 million subcontract from Ahmad Zaki Resources Bhd for the relocation of telecommunication works in relation to Mass Rapid Transit Line 2 (MRT2) (Package V202: Persiaran Dagang to Jinjang). The contract duration is 17 months (completion in Jan 2018).

The job win was not entirely surprising as management had previously guided that it was looking to undertake utilities relocation works for both MRT2 and Light Rail Transit Line 3 (LRT3). The job scope of the contract is pretty much within Propel’s expertise, which currently centres on a wide array of highway maintenance works, including utilities relocation.

The contract sum is considered to be a midsize one for Propel at 10% of its financial year ended Dec 31, 2015 (FY15) revenue. However, in the bigger scheme of things, the contract value is only 3% of Edgenta’s enlarged group revenue. The annual impact for FY16 to FY18 would be even smaller as the job is spread over 17 months.

We believe there is potential for Propel to secure more of such utility relocation contracts. MRT2 has thus far seen the award of four viaduct packages, with the remaining six to be dished out from now until the first quarter of FY17. As for LRT3, we understand that there will be a total of 10 to 12 viaduct packages. Propel’s potential participation in the utility relocation works will be via subcontracted portions from the main viaduct packages.

Risks associated with the contract are relatively minimal, as it is within Propel’s usual work scope.

Our earnings forecasts are unchanged as the impact from the contract is relatively insignificant.

We maintain “hold”, with a TP of RM3.87. While we like Edgenta’s cash flow-generating capabilities, a lack of upside catalysts, coupled with further impairment risks from Opus Stewart Weir, prompts us to retain our rating. Our sum-of-parts-based TP implies FY16 and FY17 price-earnings ratios of 17 times and 14.6 times respectively. — Hong Leong Investment Bank Research, Aug 15

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This story first appeared in TheEdgeProperty.com pullout on Aug 16, 2016, which comes with The Edge Financial Daily every Friday. Download TheEdgeProperty.com pullout here for free.