CITIC Envirotech - CIMB Research 2017-03-02: Ushering in an abundance of clean water

CITIC Envirotech - CIMB Research 2017-03-02: Ushering in an abundance of clean water CITIC ENVIROTECH LTD. CEE.SI

CITIC Envirotech - Ushering in an abundance of clean water

  • FY16 core net profit (S$102m) grew by 84% yoy, ahead of our full-year forecasts.
  • Healthy operating cashflow with low net gearing ratio, signalling potential for ROE improvement.
  • Robust project pipeline to support our double-digit earnings growth for FY17-19F.
  • Poised to gain more WWT projects with SOE-backing from new strategic investor, China Reform Fund, and its successful track record.
  • Raise our DCF-based TP to S$0.93 on higher earnings estimates. Maintain Add.

FY16 adjusted net profit above expectations 

  • CEL reported 62% yoy growth in FY16 revenue, driven by more construction activities (+156% yoy) and higher treatment income (+23% yoy). 
  • While this was broadly in line with our full-year numbers, its FY16 core net profit of S$102m (+84% yoy) beat our expectation at 121% of our forecast, thanks to lower depreciation & amortisation costs and higher associates’ contribution. 
  • Its FY16 adjusted EPS (ex-perpetuals) formed 109% of our forecast.

Financially capable to take on more aggressive growth 

  • CEL’s FY16 operating cashflow remains healthy at S$306m. Part of its US$180m perpetual capital securities (4.25%) went towards redeeming the more expensive MTNs (7.25%), bringing its net gearing ratio down to 4.2% as at end-Dec 16. 
  • The company also declared a 1 Sct DPS for FY16, translating into a 1.3% dividend yield.

Scaling up in breadth and depth 

  • Apart from a sizeable Rmb3.2bn public-private-partnership (PPP) project which CEL won in Dec 16 through a 51/49 JV with SOE and local players, the company also announced its recent penetration into river restoration and hazardous waste treatment.
  • This could mark the start of more project wins for CEL, in our view. It currently boasts an extensive asset portfolio with 58 plants and total design capacity of over 4.7mt/d.

KKR’s exit paves way for stronger tie-up with China Reform Fund 

  • In Nov 16, KKR sold its stake in CEL to the China Reform Fund (CRF), who became the second largest shareholder with a 23.9% stake. CRF is a state-owned asset management corporation tasked with spearheading SOE restructuring under the direct supervision of the Central Government. 
  • With such strong backing from its sponsors, CEL is well-positioned to capitalise on more wastewater treatment (WWT) opportunities in China, where the majority of water assets are still being held by local governments.

Reiterate Add with higher target price of S$0.93 

  • We raise our FY17-18F core EPS estimates by 42-63%, underpinned by a robust project pipeline and lower depreciation expenses, and introduce our FY19F numbers. 
  • Our DCF-based target price is now higher at S$0.93 (7% WACC), after adjusting for the 2:1 share split. 
  • We think a stronger traction in project wins and improved trading liquidity could catalyse the stock, while key risk is rising industry competition that may erode IRRs.
  • Maintain our Add call.

NGOH Yi Sin CIMB Research | http://research.itradecimb.com/ 2017-03-02
CIMB Research SGX Stock Analyst Report ADD Maintain ADD 0.93 Up 0.76