CIMB Research 2015-07-15: United Envirotech Ltd - An industrial wastewater expert. ADD.

An industrial wastewater expert

  • United Envirotech (UEL) is a vertically integrated membrane-based water & wastewater treatment (WWT) solution provider with strong presence in industrial WWT. 
  • With CITIC recently assuming control, UEL is better positioned to meet booming WWT demand in China thanks to its solid track record and improved finance capability. 
  • We initiate coverage on UEL with an Add call and DCF-based target price of S$2.01 (WACC: 6.0%). 
  • UEL is projected to deliver an EPS CAGR of 28% in FY15-20 on WWT portfolio expansion and increasing demand for its WWT EPC services and membrane products. 
  • Potential catalysts include value- and earning-accretive M&As and stronger project wins. 

Booming industrial WWT 

  • UEL is well positioned to capitalise on the policy tailwinds for industrial WWT. 
  • The “Water 10” plan recently issued by the Chinese government set comprehensive and stringent policies to regulate industrial activities. Firms from highly polluting industries are mandated to comply with stringent discharge standards by their respective deadlines. Failure to do so will lead to forced shutdown. 
  • The plan also promotes the use of market mechanisms and private sector participation in public infra projects. 

Higher investment returns 

  • We like UEL for its strategic focus on industrial WWT given the higher investment IRR. 
  • Due to higher tech entry barriers, industrial WWT is a less crowded arena and could command IRR of 12-15% or above, compared to the 8-10% IRR for a typical municipal WWT project. 

Strong sponsorship 

  • UEL has become a different animal upon CITIC assuming control. 
  • Being CITIC’s flagship for the WWT sector, UEL could leverage on CITIC’s nationwide business network for expansion. 
  • CITIC’s strong backing also allows UEL to lower its finance cost. 
  • UEL’s 3-year MTN interest cost has declined from 7.25% previously to 4.7%. 
  • We see more scope for interest savings given some of its peers’ 3-4% borrowing cost. 

More M&As drive expansion 

  • UEL’s current net gearing of c.24% (one of the lowest of peers) provides much scope for expansion via debt financing. 
  • Our projected capex of S$300m p.a. in FY15-20 will enable UEL to reach a net gearing of 70% by FY17 (management targets 70-100%). 
  • We see further valuation upside if UEL gears up faster. UEL’s 15.2x CY16 EV/EBITDA is more compelling than Singapore peer average of 16.6x and in-line with HK average of 14.7x. 

(Roy CHEN, NGOH Yi Sin)