CITIC ENVIROTECH LTD
U19.SI
CITIC Envirotech - Three-pronged approach working well
- CEL’s 1H16 core net profit was above our full-year estimate at 62% due to strong growth in all three segments: engineering, treatment and membrane sales.
- Low net gearing of 25.4% and S$362m (US$267m) remaining proceeds from issuance of perpetual capital securities to support more aggressive growth.
- Recent opening of membrane facility in Singapore and partnership could stimulate external membrane sales and act as a potential re-rating catalyst.
- We cut our FY16-18 EPS estimates by 24-34% to account for preferred dividends.
- Maintain Add with lower DCF-based target price of S$1.52 (7% WACC).
Exceptional 2Q16 earnings thanks to growth in all three segments
- CEL reported 2Q16 revenue of S$140m (US$103m), up 67% yoy, thanks to stronger growth in all three segments: engineering revenue (+105% yoy), treatment income (+24% yoy) and membrane sales (+78% yoy).
- As a result, 1H16 core net profit came in above our FY16 forecast at 62%, partly helped by the absence of tax distortion in 1H15.
- 2Q16 gross margin was relatively stable at 34.9% (vs. 34.3% in 2Q15) despite greater proportion of construction at 56% of revenue in 2Q16 (2Q15: 46%).
Adjustment for preferred dividends
- After factoring in dividends attributable to perpetual capital securities, CEL’s 1H16 core net profit was in line with our FY16 estimate at 52%.
- We adjust our EPS estimates for the dividends arising from recent issuance of perpetual capital securities (US$355m to date, 5.45%), which resulted in our FY16-18 EPS cuts of 24-34%.
Strong balance sheet with cash proceeds to pursue growth
- Although net gearing crept up slightly from 20.2% at end-1Q16 to 25.4% at end-2Q16, CEL’s balance sheet is still one of the strongest among its peers, enabling it to undertake more wastewater treatment (WWT) projects and aggressively pursue larger- scale M&As.
- Approximately S$362m (US$267m) of proceeds from recent issuance of perpetual capital securities (total US$355m) remains unutilised.
Expanded production facility to facilitate higher membrane sales
- CEL subsidiary Memstar recently opened a S$25m (US$18m) innovation centre and membrane production facility in Singapore. This 5,100 sqm new membrane production facility doubles the production capacity of its patented third generation Thermally Induced Phase Separation (3G-TIPS) membranes to 10m sqm p.a.
- Together with the partnership with Hydranautics on the design, fabrication and sales of containerised membrane systems, we believe this could boost external membrane sales.
Maintain Add with lower DCF-based target price of S$1.52
- While we raise our assumptions for construction work and membrane sales in FY16, we fine-tune those beyond FY18 as we think they were too aggressive. Hence, our DCF- based target price drops slightly to S$1.52 (WACC: 7%).
- Maintain Add.
- Risks to our Add call are slower-than-expected project pipeline and uptake of membrane.
NGOH Yi Sin
CIMB Securities
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Roy CHEN
CIMB Securities
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http://research.itradecimb.com/
2016-07-27
CIMB Securities
SGX Stock
Analyst Report
1.52
Down
1.61
