CITIC Envirotech Ltd - More diversified business scope
- Stronger than expected FY16 results on robust profitability in engineering.
- High dividends plus a special DPS of 0.25Scents were nice surprises.
- Robust project wins and order book to drive engineering revenue.
- Upgrade to BUY; TP raised to S$0.92.
Strong growth momentum.
- We upgrade our rating on CITIC Envirotech (CEL) to BUY as the accelerated deal execution pace would lead to stronger earnings growth. We expect CEL, with the support from its two SOE shareholders, will be able to secure more deals, particularly in new business areas.
- Coupled with its leading technology in membrane, CEL is well positioned to grab more market share in the water sector.
FY16 results above expectations.
- CEL’s FY16 net profit doubled to S$99.3m, 20% higher than our estimate. The major variance was the strong profitability from engineering with segmental margin surging from 16.8% to 27%.
- Total turnover jumped 62% to S$544.6m, led by an increase of 156% and 23% in engineering and treatment revenue respectively. However, membrane sales dropped 22% due to the completion of Chengdu Xingrong project. CEL clinched new projects worth c.Rmb4bn in 2016, compared with c.Rmb3bn in 2015.
- Treatment margin declined by 4ppts to 45% while membrane margin fell by 14ppts to 35%. A final DPS of 0.75Scents was much higher than 2015’s 0.18Scents. A special DPS of 0.25Scents was also a nice surprise.
More new projects in new areas.
- CEL achieved some key milestones in FY16. For instance, CEL won its first river restoration project in Jiangsu, the first project in hazardous waste treatment and the first circular economy Public-Private-Partnership project in an industrial park. All these projects are in strategic areas where the government would like to focus to combat the water pollution issue.
- We are optimistic that CEL’s deal flow will continue to grow. With a stronger order backlog, we expect construction progress to accelerate going forward.
- We have raised our FY17F/18F earnings estimates by 24-26% to reflect the strong construction progress, and FY17F/18F net profit is now expected to jump 55%/29%.
- Given such strong momentum, we have nudged up our target PE. Our TP is revised up to S$0.92, based on 15x (previously 12x), 25x (20x) and 25x (20x) 12-month rolling PE (adjusted for construction revenue) for engineering, procurement and construction (EPC) services, treatment services, and membrane sales respectively.
- Upgrade to BUY.
Key Risks to Our View
- Delay in construction progress of EPC projects could hurt top-line growth.
- Further depreciation of Renminbi will also hurt earnings growth.