Looking ahead to better quarters
- UEL’s 1QFY12/15 results came in weaker than expected, with sales at 26% and core EPS at 26%/17% of our/consensus 9MFY12/15 forecasts.
- On account of slower take-up of membrane sales and engineering projects, as well as higher financing costs, we trim our FY15-17 EPS forecasts by 7-14%.
- Hence our DCF-derived target price (WACC: 6%) falls slightly to S$1.95 (from S$2.01).
- The overall outlook continues to be positive as CITIC Envirotech, becomes a more powerful platform in developing China’s wastewater treatment (WWT) sector.
- Potential key catalysts include new project wins and accretive M&As.
- Maintain Add.
Core EPS increased 21.6% yoy
- 1QFY15 revenue grew 26.4% yoy but was offset by a 94.2% rise in operating costs.
- On a yoy comparison, engineering segment remained stable, while treatment income was up by 75.6% vs. +28.4% for external membrane sales.
- Operating costs were higher due to one-off expenses of S$6.5m from the General Offer by CITIC Environment and KKR.
- Excluding these non-recurring items, core net profit expanded by 20.3%.
- At 38.3%, UEL’s net gearing remains one of the lowest among peers with room for further leverage to improve ROE.
Positive outlook still intact
- The State Administration of Taxation in China recently announced a reduction in VAT rebate from 100% to 70% (based on 17% standard VAT rate); applicable to all wastewater and solid waste operators effective 1 July 2015.
- While this potentially affects 5-7% of UEL’s bottomline, we remain of the view that the industry outlook is still favourable, given the increasing policy emphasis on better water quality and WWT project availability.
- The company intends to mitigate this impact by negotiating for higher tariffs.
CITIC Envirotech now better positioned
- Effective 30 July 2015, UEL will adopt a new name, CITIC Envirotech Ltd.
- With its technological expertise and CITIC channelling all future water projects to it, the company is on track to gain market share in the industrial WWT space.
- In Apr 15, UEL announced 2 acquisitions:
- Bishui Lantian with Rmb800m TOT cum BOT projects (200k tons/day) in Hebei Province, China and
- S$41m BOO project of industrial park WWT plant (20k tons/day) in Jiangsu, China.
Analyst: NGOH Yi Sin; Roy CHEN
Source: http://research.itradecimb.com/
