CITIC ENVIROTECH LTD
U19.SI
CITIC Envirotech - Geared for higher growth
- CEL reported strong 3Q15 results, with 9M15 core EPS above our estimate at 138% due to higher-than-expected membrane sales and engineering income.
- Excluding one-off items, 9M15 core net profit rose 15.6% yoy.
- Net gearing as of end-Dec 15 was 18%, with ample leverage potential.
- Strong project pipeline will support future earnings growth, in our view.
- Maintain Add, with lower DCF-based target price of S$1.61 (WACC: 7%).
■ Stronger membrane sales and treatment income in 3Q15
- CEL’s 3Q15 revenue rose 3.5% yoy, thanks to higher treatment income (+36.3% yoy) and greater external membrane sales (+194.7% yoy). However, on a 9-month basis (FYE was changed from 31 Mar to 31 Dec in 2015), revenue fell 4.5% yoy to S$275m due to lower engineering business.
- 9M15 gross margin improved from 27.7% to 31.8%, as treatment services generally earn higher margins. The estimated S$7m-8m VAT refund contributed to the 24.6% rise in other income for 9M15.
■ Better gross profit offset by higher other operating expenses
- Despite better gross profit, 9M15 net profit fell 20.5% yoy due to these reasons:
- employee benefits expenses were higher (+79.7% yoy) due to additional headcount for new treatment plants and Memstar manufacturing facilities,
- the increase in service concessions led to higher amortisation of intangible assets, and
- higher taxes due to distortion by one-offs.
- Excluding non-recurring items, 9M15 core net profit improved 15.6% yoy.
■ Ample leverage potential for more aggressive growth
- The issuance of perpetual capital securities (US$175m at 5.45% per annum) in Nov-15 has lowered CEL’s net gearing to 18% as of end Dec 15, offering it significant leverage potential to pursue more aggressive growth.
- It would also allow CEL to finance the repayment of S$97.7m medium-term notes (7.25%) due in Sep 16, thereby reducing the average cost of debt.
- FY15 DPS of 0.36 Scts was declared versus 0.5 Scts for FY14, translating into CY15 dividend yield of 0.4%.
■ Strong project pipeline to support earnings growth
- In Nov 15, CEL announced a S$122m Public-Private Partnership project in Liaoning, along with a total of S$137m build-operate-transfer (BOT) projects across China and Indonesia.
- The majority of the BOT projects are expected to commence in 2016, which we expect to drive earnings moving forward. These projects are a mix of industrial wastewater treatment (WWT) and membrane bioreactor (MBR) systems, which offer IRRs of over 10%.
■ Maintain Add with DCF-based TP of S$1.61
- We tweak our FY16-17 margin assumptions slightly, resulting in 0.2-1.0% increase in FY16-17 EPS estimates.
- Our DCF-based target price falls from S$1.80 to S$1.61 as we allocate a higher WACC of 7% (previously 6%) to be in line with industry peers.
- We maintain our Add rating on CEL.
NGOH Yi Sin
CIMB Securities
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Roy CHEN
CIMB Securities
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http://research.itradecimb.com/
2016-02-24
CIMB Securities
SGX Stock
Analyst Report
1.61
Down
1.80
