SIIC Environment - DBS Research 2017-02-17: Taking a breather

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SIIC ENVIRONMENT HOLDINGS LTD. BHK.SI

SIIC Environment - Taking a breather

• FY16 results disappointed after stripping out revaluation gains.
• No new operating capacity to be added in FY17.
• Further delay in dual-listing in Hong Kong.
• Downgrade to HOLD with TP lowered to S$0.55.

Disappointing results. 

• We downgrade our rating on SIIC Environment (SIIC) from BUY to HOLD due to several disappointments: 
  1. FY16 results were below expectations, 
  2. growth in operating capacity in FY17 will be slower than expected, and 
  3. dual-listing in Hong Kong has been delayed again, to 3QFY17. But we have doubts on whether the listing will go ahead, which would dampen sentiment towards the stock.

FY16 results below expectation. 

• SIIC recorded 26.2% growth in FY16 net profit to Rmb454.9m, in line with our estimate.
• However, stripping out the revaluation gain of Rmb155m, the results were below our expectations because of higher administration cost (due to acquisitions) and finance expenses.
• Turnover increased 46.8% to Rmb2.6bn, 10% above our estimate. With the fast progress, construction revenue almost doubled. Thanks to contribution from newly acquired projects, higher sewage treatment volume led to 23.9% growth in O&M income. 
• Net debt-equity ratio reached > 100% but should fall to c.80% after the share placement to the parent. 
• A final dividend of 0.01 Scent was declared (FY15: nil).

Slow organic growth in FY17. 

• While construction revenue in FY17 will be similar to that in FY16 (i.e. not much growth), there will be no addition to operating capacity in FY17 as construction work will not be completed until the end of FY17 or early FY18. Thus, growth in treatment volume will be led only by the full recognition of its new acquisitions in FY16. 
• In addition, as Longjiang Environment’s average tariff is lower, the average sewage treatment tariff of SIIC will be dragged down from Rmb0.95 to Rmb0.85/ton. 
• Although the company targets to add 1-1.5m tons of new capacity to its portfolio in FY17, we expect M&As to slow down before the finalisation of the dual-listing plan.

Valuation

• To reflect the higher operating cost, we have cut our FY17 and FY18 earnings forecast by 23-35%. 
• Our TP is also lowered to S$0.55, based on 25x FY17F PE (excluding construction revenue).
• Downgrade to HOLD.

Key Risks to Our View

• Operational. Slower-than-expected deal flows, project upgrades and tariff hikes are downside risks to our earnings estimates.

Patricia YEUNG DBS Vickers | http://www.dbsvickers.com/ 2017-02-17

DBS Vickers SGX Stock Analyst Report HOLD Downgrade BUY 0.55 Down 0.680