SIIC ENVIRONMENT HOLDINGS LTD.
BHK.SI
SIIC Environment - Valuation getting attractive
- Robust earnings growth of 26% for 1HFY16.
- Expect 17-23% increase in O&M service through upgrading.
- A new deal in WTE is positive.
- Attractive valuation at -1SD; upgrade to BUY with TP at S$0.69.
Upgrade to BUY.
- Although SIIC has no exposure in comprehensive renovation treatment market, it is progressing well by gradually expanding its water treatment portfolio with good growth potential from upgrade and tariff hike.
- It is also grabbing opportunities in sludge treatment market.
- Following a correction of 26% in the past few months, current valuation looks attractive.
- We upgrade our rating to BUY.
26% growth in 1HFY16 net profit.
- 1HFY16 turnover and net profit increased 42% and 26% respectively. Growth was underpinned by the acquisition of Fudan Water completed in 2H15 and upgrade / expansion of water projects with a total capacity of 312.5k m3/day.
- Operating capacity reached around 4m m3/day. During the period, water tariff increased 5-10% with average tariff at Rmb1.05 per m3.
- Overall gross margin dropped >9ppts due to higher proportion of construction revenue but gross margin of various segments remained relatively stable with that of O&M ranging from 31% to 43%.
Tariff hike to raise O&M revenue.
- While SIIC continues to look for M&A candidates to achieve its new capacity target of 1-1.5m m3/day, we also see growth potential in O&M revenue, driven by tariff hike.
- SIIC currently has 1.5m m3/day of projects below Grade 1A, of which 750k m3 are being upgraded. SIIC is also negotiating with government regarding upgrade for 500k m3 of capacity. These should increase O&M services by 17-23% in FY16/17.
- We are also pleased that SIIC has finally made some progress in WTE market by concluding an acquisition which will raise its portfolio by 600 m3/day to 3,800 m3/day.
- In addition, it is capturing opportunities in sludge treatment market with capacity reaching 935 m3/day. We expect more sludge treatment projects to be secured going forward.
Valuation
- SIIC has dropped as much as 26% since April.
- We reckon the current valuation, which is close to -1SD from the 5-year historical average of 16x PE, is attractive.
- Our TP is set at S$0.69, which is based on 25x FY17 PE (adjusted for construction revenue).
Key Risks to Our View
- Operational. Slower-than-expected deal flows, project upgrades and tariff hike will have an downside risk on our earnings estimates.
Patricia YEUNG
DBS Vickers
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2016-08-15
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