SIIC Environment - DBS Research 2016-08-15: Valuation getting attractive

SIIC Environment - DBS Vickers 2016-08-15: Valuation getting attractive 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.


  • 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 | http://www.dbsvickers.com/ 2016-08-15
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