Await new projects
- CEWL’s 1HFY15 EPS was in line with our forecasts at 49% but below consensus at 44%.
- We tweak our EPS numbers downwards by 0.1-1.4% to adjust for higher admin expenses and other income, and lower our DCF-based target price (WACC: 6%) to S$1.13 (from S$1.15).
- We remain positive on the sector as the recently-enacted Environmental Protection Law of China will drive greater investment and capacity expansion in the industry.
- Potential key catalysts include stronger project wins and accretive M&As.
- We reiterate our Add recommendation.
Decent 2QFY15, core net profit up 12.4% yoy
- CEWL reported 93% increase in 2QFY15 revenue on the back of higher construction income from expansion and upgrading of several projects, which accounted for 39% of total revenue (vs. 20% in 2QFY14).
- As construction activities generally have lower margins, gross profit margin dipped to 44% vs 67% in 2QFY14.
- On a yoy comparison, other income jumped by 986% from HK$1.2m to HK$13.1m (more government grant and FX gains), while admin expenses of HK$45.2m were higher by 308% to account for the enlarged group after HanKore’s RTO.
Net gearing improved to 10.2%, ample leverage potential
- Proceeds of share issuance led to lower net gearing of 10.2% this quarter, vs. 21.0% in 1QFY15.
- As this is one of the lowest among peers, CEWL has significant room to leverage up for better ROE.
- We saw a 72% yoy rise in 2QFY15 financing costs as a result of more expensive borrowings on a consolidated basis after the RTO.
- We expect financing costs to come down as HanKore’s S$50m 7.5% fixed-rate MTN has been fully redeemed on 1 Aug 15, while IFC has extended a US$140m 10-year loan to CEWL on 29 Jul 15.
2015: a year of consolidation
- CEWL has been focused on internal consolidation for the most of 1H15 and CEI (parent company of CEWL) has also completed the group’s restructuring in May 15.
- CEWL continues to seek opportunities for larger market share, as well as expanding into industrial wastewater treatment (WWT) through technological improvement.
- We project the slow acquisition pace in FY15 to pick up in FY16 onwards.
- The project pipeline for 2H15 remains strong, with three projects under construction..
Analyst: NGOH Yi Sin; Roy CHEN; Keith LI
Source: http://research.itradecimb.com/
