SIIC Environments Holdings - RHB Invest 2016-10-19: Finally Got There

SIIC Environments Holdings - RHB Invest 2016-10-19: Finally Got There SIIC ENVIRONMENT HOLDINGS LTD. BHK.SI

SIIC Environments Holdings - Finally Got There

What’s New? 

After a long wait. 

  • After 4 years of talks, SIIC finally announced a proposed acquisition of 32.7% equity interest in Longjiang Environmental Protection Group (Longjiang Group) last evening. Total consideration amounts to CNY836m. The company intends to fund it using internal cash resources and borrowings.

Exceed the annual capacity growth target! 

  • Longjiang Group has 3.55m tonnes/day of water treatment and supply design capacity and 1,330 tonnes/day of sludge handling design capacity. 
  • The acquisition expedited SIIC’s capacity growth, allowing it to hit its annual capacity growth target of 1-1.5m tonnes/day. 
  • SIIC total design capacity will exceed 10m tonnes/day following this acquisition.

Our View: 

Forward valuation could sound more reasonable. 

  • On first glance, the deal seemed a tad more expensive than expected. 
  • Based on last year’s net profit, the target is valued at 21x FY15 P/E, which is slightly higher than peers’ average of 18x. 
  • We think valuation could be more reasonable at about 15x using FY16 estimates due to Longjiang Group’s strong growth profile. SIIC’s associate results grew >100% in 1H16 mainly due to contribution from Longjiang Group. 
  • Longjiang Group’s total design capacity also expanded by 0.68m tonnes/day since 2014, hence there could potentially be more plants commencing operations in the near term.

Forward prospect. 

  • We believe Longjiang Group’s market leadership in the Heilongjiang region will put SIIC in good stead to secure more projects in China’s North-East region. 
  • In addition, SIIC’s ability to restructure Longjiang Group’s debt and bring down its borrowing cost will help to improve its profitability.
  • Pending updates from management during its analysts’ briefing today. Our last call on the stock was a BUY with TP SGD1.26.

Juliana Cai RHB Invest | 2016-10-19
RHB Invest SGX Stock Analyst Report BUY Maintain BUY 1.26 Same 1.260