Underlying growth still strong
- Profit from underlying business up 20% in 1QFY16.
- Expect Chengdu Xingrong upgrade project to kick start in 2HFY16.
- Higher utilization rate of operating plants.
- Maintain BUY with TP revising down to S$1.85.
1QFY16 net profit up 20% after stripping out one-off items.
- United Envirotech reported 84% y-o-y drop in net profit to S$3.7m in 1QFY16.
- However, after stripping out one-off disposal gain of Memstar Technology in 1QFY15 and fees related to the general offer in 1QFY16, net profit of the underlying business improved 20%.
- As there was no new 3rd party EPC projects, engineering sales remained flat.
- However, treatment sales jumped 76% y-o-y on improvement in utilization of treatment plants and more plants becoming operational.
- Membrane sales also exhibited robust growth of 28% y-o-y.
Expect stronger growth in 2HFY16.
- We have revised down our growth assumption for engineering sales by 10ppts to reflect the slower growth in 1H.
- However, the formation of a JV with Chengdu Xingrong is close to a completion.
- Given the first block EPC work is already worth S$300m, this would boost engineering sales in 2H.
- We have also revised up our growth assumption by 29ppts to 46% for treatment services as improvement in utilization of operating plants was better than expected.
- We believe the uptrend in utilization continue.
- All-in, we have revised down our FY16 and FY17 earnings by 16% and 11% respectively.
Maintain BUY.
- We maintain our BUY rating as we remain optimistic that UENV’s strong capability in membrane technology will help it to gain more contracts.
- Our TP is adjusted down from S$2.00 to S$1.85, which is based on 15x FY17 3rd party EPC earnings (adjusted to strip out construction revenue of BOT projects), 40x for treatment services and 18x for membrane sales.
- Downside risk would be a delay in the Chengdu Xingrong upgrade project or lumpy EPC order book.
Analyst: Patricia YEUNG
Source: http://www.dbsvickers.com/
