SIIC Environment - DBS Research 2016-10-19: Robust M&A flow

SIIC Environment - DBS Research 2016-10-19: Robust M&A flow SIIC ENVIRONMENT HOLDINGS LTD. BHK.SI

SIIC Environment - Robust M&A flow

  • Increase stake in Longjiang Environmental from 25.3% to 58.0% for Rmb836m.
  • Expect the progress of dual listing in Hong Kong to accelerate.
  • Raise FY17 and FY18 earnings estimates by 6-7%.
  • TP raised to S$0.78; maintain BUY.



Progressing well. 

  • SIIC is progressing well by gradually expanding its water treatment portfolio with good growth potential from upgrade and tariff hike. The recent M&A transactions will strengthen its market position even further. It is also grabbing opportunities in the sludge treatment market. 
  • We reckon that progress of its dual listing application in Hong Kong can accelerate which could be a share price catalyst. 
  • We maintain our BUY rating.


Increasing stake in Longjiang Environmental. 

  • Following the acquisition of Ranhill Water in Sept, SIIC announced to acquire c.30.8% and c.1.9% of Longjiang Environmental (LJE) for considerations of Rmb788m and Rmb48m from Tsinghua Tongfang and Hangzhou Wei Run respectively.


The consideration will be settled in cash. 

  • After the transactions, SIIC will hold c.58.0% of LJE which will be SIIC’s strategic vehicle for the development in North Eastern China. LJE’s project portfolio has 3.55m tons/day and 1,000 tons/day of water treatment and sludge treatment capacity respectively. The transaction will lift SIIC’s total water treatment capacity to 10m tons/day. 
  • LJE has a strong project pipeline under negotiation with government. Thus, SIIC is optimistic to add 1.5m tons of daily capacity to its portfolio each year.


Tariff hike to raise O&M revenue. 

  • Apart from M&A, we also see growth potential in O&M revenue, driven by tariff hike. SIIC currently has 1.5m m3/day of capacities at below Grade 1A, of which 750k m3 are being upgraded. SIIC is also negotiating with government regarding upgrade for 500k m3 of capacity. In addition, > 90% of LJE’s projects have discharge standard of Grade 1B or 2 which will be upgraded subsequently. These should increase O&M services by 17-23% in FY16/17.
  • We are also pleased that SIIC has finally made some progress in WTE market by concluding an acquisition which will raise its portfolio by 600 m3/day to 3,800 m3/day. In addition, it is capturing opportunities in the sludge treatment market with capacity reaching 935 m3/day. We expect more sludge treatment projects to be secured going forward.

Valuation

  • We have raised our FY17 and FY18 earnings estimates by 6-7% to reflect the increased stake in Longjiang Environmental. 
  • We reckon the current valuation, which is close to -1SD from the 5-year historical average of 16x PE, is attractive. 
  • Our TP is set at S$0.78, which is based on 25x FY17 PE (adjusted for construction revenue).

Key Risks to Our View

  • Operational. Slower-than-expected deal flows, project upgrades and tariff hike will have an downside risk on our earnings estimates




Patricia YEUNG DBS Vickers | http://www.dbsvickers.com/ 2016-10-19
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 0.78 Up 0.690



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