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Digitalising Healthcare, Embracing The New Normal

Digitalising Healthcare

 

We expect Digitalising Healthcare’s earnings to grow robustly at 67% CAGR in 2021-23 as it stands to be the prime beneficiary of the economic reopening and healthcare industry growth, being among the major laggards in the market. 

This will support its dividend payout ratio of 70%, providing yields of 5-7% for 2021-23, which is consistent with its dividend policy. It is also expected to be eligible for FTSE4Good Bursa Malaysia (F4GBM) Index inclusion this year. Initiate coverage with BUY. Target price: RM2.30.

INITIATE COVERAGE 

• Promising earnings growth. As a major laggard in the economic reopening play, UEM Edgenta (UEME) is expected to post strong earnings CAGR of 66.6% for 2021-23 coming off the low base in pandemic-stricken 2020, with a healthy EBITDA margin of 10-12%. This will be underpinned by its robust orderbook of RM12.2b mainly from its healthcare and infrastructure services divisions (renewal rate of 70-80% historically), coupled with operational efficiency through its advanced technology integration. 

 

The growth of the healthcare industry, lifting of the interstate travel ban, growing traction of environmental awareness and rollout of infra projects act as catalysts to further support its earnings visibility, for the next 3-5 years. We believe UEME has a positive growth outlook, backed by its parent company UEM Group (owned by Khazanah Nasional). 

• Healthy dividend payout of over 50%. With UEME’s strong net cash position of RM206.2m (24.8sen/share) and gross gearing ratio of 0.32x, we expect dividend yields of 5- 7% for 2021-23F, offering further potential upside once earnings normalise. This is based on a dividend payout of 70% (similar to historical average payout), and is consistent with its dividend policy (50-80%). 

 

Historically, UEME has given out special dividends to optimise its balance sheet and we believe the generous dividends are sustainable, backed by earnings from its long-dated concessions with 81 government hospitals, and more than 3,000km of highways in Malaysia. 

• Strong ESG practices could lead to F4GBM Index inclusion. UEME has successfully integrated Environmental, Social and Governance (ESG) practices across its core divisions, including securing Gold ratings in Leadership in Energy and Environmental Design for hospitals, recycling 12 tonnes of waste p.a., improving energy efficiency and reducing carbon emissions. UEME is working to get itself added to the index this year. This will further enhance its outlook as it will raise its visibility to a wider base of investors. 

• Initiate coverage with BUY and target price of RM2.30. The stock is still trading close to multi-year lows (-1SD to its five-year mean). Our fair value is based on SOTP valuation, which implies 13x 2022F PE, or -0.5SD to its 5-year mean PE of 15x.

STOCK IMPACT 

• HSS anchors earnings visibility. Healthcare support services (HSS) consists of concession and commercial businesses. Concession contracts are mainly for providing services to 32 public hospitals in north Malaysia, under a 10-year contract (until 2025) worth about RM3b. 
 
UEME also serves 26 and 23 public hospitals in Sabah and Sarawak respectively through its 40%-owned associates Sedafiat and One Medicare (until 2025). UEME has been securing renewals for these concessions for the past 20 years. 
 
• Commercial business as key growth driver. To diversify away its heavy reliance on concessions, UEME grew its commercial business via the acquisition of one of the top regional players, UEMS, in 2016. 
 
Via this acquisition, it expanded its commercial footprint to over 20 private hospitals in Malaysia, and more than 10 and 40 hospitals in Singapore and Taiwan respectively, commanding about 50% of the public hospitals’ market share in those countries. Going forward, UEME aims to widen its footprint in the Southeast Asia region while also penetrating new growth markets such as Indonesia and Middle East. 
 
• Infrastructure services ensure income stability. The main project anchoring this segment’s earnings is the maintenance of PLUS North-South Expressway. The concession provides solid earnings visibility as it will last until 2038. 
 
Among other notable projects are East Coast Expressway 2, Sarawak Coastal Road, Pan Borneo Highway Sabah and Cikampek-Palimanan Highway Indonesia. Earnings should pick up: a) once the economic recovery takes place, and b) as the interstate travel ban has been lifted in 2021. Moving forward, earnings growth will be further supported by new contracts won, ie Sarawak State Road Pavement, Pan Borneo Sarawak, and JKR Selangor. 
 
• Property & facility solutions integrate technology into asset maintenance. This segment focuses on energy efficiency and sustainability in facility management services for over 300 buildings in Malaysia and UAE, reducing operational costs while optimising asset value. 
 
Moving forward, the division aims to sustain its growth trajectory by securing more high-value commercial contracts, industrial-based buildings, energy performance contracting jobs, and penetrating growth markets such as the Middle East. It has already set foot in Dubai through its subsidiary Operon Middle East. 
 
• Asset consultancy will be the prime beneficiary of mega infrastructure projects rollout. This segment’s earnings should recover once the economic reopening takes place as a lot of its projects were deferred last year due to the pandemic.
 
-By UOB Kay Hian Research
 
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