Regional Expansion To Ensure Sustainable Growth Ahead
Recent partnerships in Dubai and Sarawak enhance UEME’s outlook for future growth.
UEME’s earnings are expected to rebound in 2022, led by its healthcare and
infrastructure divisions, which are the prime beneficiaries of the economic reopening.
This will support its dividend payout ratio of 50-80% (yields: 4-6%) for 2022-24.
Fundamentals remain intact for growth, supported by healthy orderbook of RM10.8b
(revenue cover: 4.9x). Maintain BUY. Target price: RM2.09.
WHAT’S NEW
• Continued regional expansion… Recently, UEM Edgenta (UEME) (via EdgentaNXT)
executed a memorandum of business exploration in Dubai with two fintech companies, Byte
Blanket FZE and Disrupt-X DMCC to strengthen its digital ecosystem. This signifies its
strategic venture to identify technological collaborations in supporting sustainable smart
cities in the Middle East. This is in addition to other collaborations that it has entered into in
the region, including its partnership with ASMA last year. It has identified a few projects in
the bid pipeline worth >RM3b with local partners including projects such as Al Ansar Hospital
and SABIC Behavioral Care Specialist. For the pilot project with a leading healthcare cluster
in Mekkah, UEME is progressing into commercial discussion.
• …for further diversification. This development is in line with our expectation, where we
believe UEME will continue to enter into partnerships and collaborations to expand its
footprint globally, reducing its reliance on the existing core markets (Malaysia, Singapore
and Taiwan). With its successful track record in transforming buildings like KLCC into a
smart building, we believe it has a positive prospect in this space. However, the potential
earnings contribution may only be translated, the earliest in 1-2 years’ time since it is still at
the exploration stage (similar timeline as its Saudi ventures).
• Spreading wings in Borneo. UEME has also entered into a JV with Sarawak state–owned
body, Sarawak Economic Development Corp (SEDC) to strengthen the delivery of mega
infrastructure projects in Sarawak via project management and engineering design
consultancy services, at least for the next five years. We believe this will strengthen UEME’
relationship with the state, which will help it to capture new contracts this year backed by the
state’s budget of >RM4b worth of infra projects. UEME plans to strengthen its foothold in
Borneo, having secured major projects such as Pan Borneo Highway, Kuching Urban
Transportation System and Second Trunk Road. Sarawak contributed around RM400m to
total orderbook and is expected to offer >RM700m in the coming 2-3 years.
STOCK IMPACT
• Prospects remain intact… UEME is expected to post strong earnings growth in 2022
(>100% yoy), supported by its healthy orderbook of RM10.8b (earnings visibility: 3-5 years)
that is driven by the healthcare and infrastructure divisions (90%). It plans to boost
orderbook by RM1b-2b/year while diversifying away its heavy reliance on concession
business as >50% of the RM1b new job wins in 2021 came from the commercial business.
As the local market is getting more saturated, UEME is also looking to further expand its
global presence to diversify its business and obtain better margins, especially from Saudi,
Singapore and Dubai. Note that >70% of the new job wins in 2021 were from overseas
(Singapore, Taiwan, Dubai) while the remaining 30% came from Malaysia, including MOH’s
hybrid ICU and vaccination centres.
• …supported by robust orderbook. We believe UEME will win more contracts this year as
many maintenance jobs in 2021 have been deferred to 2022. Malaysia, Taiwan and
Singapore remain as its strong foothold (>90% of orderbook) while further growth will come
from the Middle East. For Singapore, UEME aims to widen its footprint by obtaining an ME15 licence to bid for more hard services contracts, expanding its business from hospitals into
commercial buildings. Hard services like biomedical and facilities engineering maintenance
services contribute >50% of the healthcare concession’s earnings and provide higher margin
(double digits) vs soft services like portering and janitoring that only offer single-digit
margins. Hence, UEME is looking to acquire a company there (given its low gearing ratio of
0.29x) in order to achieve this goal in 2022.
• Healthcare remains the main contributor. The healthcare division represented about 78%
and 68% of UEME’s 2021 earnings and new job wins respectively. Its revenue and profit
rebounded qoq in 4Q21 by 19% and 3%, driven by its commercial contracts secured in
Singapore and Taiwan, coupled with higher billable jobs and new COVID-19-related
businesses in Malaysia. We expect the earnings will continue to improve supported by
higher work orders in Malaysia, Singapore and Taiwan while hospital contract costs will also
gradually ease given that hospitalisation rate in Malaysia has been declining over 80% since
the peak in Aug 21. Being a part of the Penang-Singapore VTL programme, UEME has also
recently secured a contract providing on-arrival RT-PCR test at Penang International Airport.
This will translate positively to its earnings in the upcoming quarters.
• Infrastructure to boost earnings for recovery. Recently, the division has also secured
some additional work for its existing projects (LPT2 and SUKE). Earnings are expected to
grow around 50% this year, supported by higher traffic volume in Malaysia and Indonesia
amid the border reopening, which will increase its work for all non-critical civil and pavement
work orders. This has been gradually reflected since 4Q21 where the infrastructure profit
before tax rebounded >100% qoq. This division represents around 60% of UEME’s total
orderbook. Moving forward, the resumption of infrastructure projects such as the Pan
Borneo Highway would also support the divisions’ outlook going forward.
EARNINGS REVISION/RISK
• None.
VALUATION/RECOMMENDATION
• Maintain BUY with an unchanged target price of RM2.09, which implies 17x 2022F PE
(five-year mean PE). Its robust orderbook of RM10.8b will support its 2021-24 net profit
CAGR of around 50%. This is further supported by attractive yields of about 5% with healthy
dividend payout of 50-80%, backed by strong net cash position of RM167.8m and gross
gearing ratio of 0.29x.