CITIC Envirotech (CEL SP) - UOB Kay Hian 2018-02-12: Opportunity To Buy Cheap On 2018 Valuations

CITIC Envirotech (CEL SP) - UOB Kay Hian 2018-02-12: Opportunity To Buy Cheap On 2018 Valuations CITIC ENVIROTECH LTD. CEE.SI

CITIC Envirotech (CEL SP) - Opportunity To Buy Cheap On 2018 Valuations

  • Management is exceptionally confident about the company’s outlook amid strong government emphasis on environmental protection and we share their confidence.
  • As one of the best in the business, CITIC Envirotech (CEL) used to be one of the most expensive water businesses in Singapore. However, with superb profit growth forecasted for 2018, the stock is now the cheapest on 2018 valuations. 
  • Maintain BUY with DCF-based target price raised to S$1.11 on a 2.8-19.2% increase in 2017-19 earnings forecasts.



WHAT’S NEW

  • We met with CITIC Envirotech’s (CEL) management recently. This report highlights the key takeaways.


INVESTMENT HIGHLIGHTS


Strong management confidence given government emphasis on environmental protection. 

  • Management reiterated their strong confidence in the company’s outlook as the Chinese government increases its emphasis on environmental protection. China is demanding higher standards for wastewater and decides on the positions that government officials should have (and their future prospects) based on how well they meet these hard targets.

Membrane technology is the only viable long-term solution. 

  • Conventional technology cannot fulfil long-term guidelines of achieving standard IV and above (by 2025/2030) and the only viable technology available is membrane technology. Thus, with management bidding for multiple mega projects and being confident of winning some, we believe CITIC Envirotech can deliver at least another S$1b in project wins in 2018, sustaining its project wins momentum. 

Stellar results expected to continue in 2018. 

  • With a review of macro conditions, we believe there is a low probability of any major negative changes for CITIC Envirotech in 2018.
  • Furthermore, we expect water treatment revenue to catch up with the engineering segment’s, growing by 60% in 2018. As such, we share management’s confidence in CITIC Envirotech’s outlook.

Superb growth makes it cheap on 2018F earnings. 

  • As one of the best industrial water treatment companies in China, CEL enjoys top valuation multiples and is one of the most expensive in terms of PE (currently trading at 13.6x 2017F PE). 
  • With CITIC Envirotech moving into 2018 and with superb profit growth on the horizon, CITIC Envirotech looks very attractive at 2018F PE valuations (currently trading at 9.3x 2018F PE vs 18.2x for peers). If CITIC Envirotech maintains its 2017 valuation multiple of 13.6x into 2018, CITIC Envirotech could trade as high as S$1.02.


EARNINGS REVISION/RISK


Raise earnings forecasts for 2017-19. 

  • We raise our 2017-19 net profit forecasts by 2.8%, 10.4% and 19.2% respectively.
  • Key risks include a delay in project construction and a weakening of the renminbi.


VALUATION/RECOMMENDATION


Maintain BUY and raise DCF-based target price to S$1.11. 

  • Our target price implies a 2019F PE of 11.1x, mirroring SG/HK peer average of 11.1x. 
  • Being one of the best in the business, CITIC Envirotech used to be one of the most expensive water businesses in Singapore. However, with superb profit growth forecasted for 2018, the stock is now the cheapest on 2018 valuations vs its Singapore peers such as SIIC and China Everbright Water.
  • Furthermore, the stock also offers an attractive forward yield of 3%.


SHARE PRICE CATALYST

  • Stronger-than-expected results.
  • Further contract wins.
  • Share buybacks from CITIC Envirotech




Edison Chen UOB Kay Hian | Nicholas Leow UOB Kay Hian | http://research.uobkayhian.com/ 2018-02-12
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 1.11 Up 1.090



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