CITIC Envirotech - CIMB Research 2017-04-26: Ebb and Flow of Water Treatment

CITIC Envirotech - CIMB Research 2017-04-26: Ebb and flow of water treatment CITIC ENVIROTECH LTD. CEE.SI

CITIC Envirotech - Ebb and flow of water treatment

  • 1Q17’s core net profit of S$22m was broadly in line at 20% of our FY17F forecast as the first quarter is seasonally the weakest for the year.
  • Robust project pipeline with continued project wins to support earnings momentum.
  • Reiterate Add rating with unchanged assumptions and TP of S$0.93.

Expect catch-up in coming quarters

  • 1Q17 headline revenue of S$114m (+14% yoy, -32% qoq) made up 17% of our fullyear number, despite seeing growth across engineering (+53% yoy) and treatment (+5% yoy) segments. 
  • Treatment income fell 17% qoq on divestment of the WWT plants (Qitaihe and Hegang) and seasonality effects, while membrane sales were down 43.4% yoy to S$13m in tandem with completion of a major project.
  • Sales mix changes led to a lower 1Q17 gross margin of 31.4% (1Q16: 37.3%), as engineering revenue contributed 84% to the topline, vs 65% in 1Q16. However, we deem this set of quarterly results broadly in line due to 
    1. the lumpy nature of construction activities and membrane sales, 
    2. a seasonally-weaker first quarter, and 
    3. stronger traction in project roll-out on the back of a robust pipeline.
  • Stripping out non-operational FX losses, 1Q17 core net profit improved 34% yoy, forming 20% of our FY17F forecasts. Its core net profit (ex-perpetuals) grew by a smaller 22% yoy in 1Q17.

Financing not an issue

  • While CEL’s net gearing ratio crept up slightly from 4Q16’s 4.2% to 1Q17’s 11.4%, its financing costs fell significantly to S$6m (vs. 4Q16: S$10m and 1Q16: S$11m) as the more expensive MTN of S$100m was refinanced in FY16.
  • With S$78m in unutilised proceeds from the issuance of perpetual capital securities (US$355m, 5.45%) previously, the company continues to be financially-healthy to take on more WWT project acquisitions. 
  • We also note that CEL has secured credit facilities of up to RMB20bn from China Merchants Bank.
  • 1Q17 operating cashflow shrank from 4Q16’s S$13.7m to S$0.4m, largely due to differences in timing of receivables’ collection.

Continued flow of project wins

  • Since the start of FY17, CEL has announced three new projects, ranging from its first river restoration project (RMB650m) in Yixing, Jiangsu to a water recycling project (RMB230m) in Changyi City, Shandong. These projects are estimated to commence construction and contribute income in FY17.
  • We expect CEL to achieve its 12-15 project wins annually, with subsequent ones likely to be of bigger scale. Management is also keen on earnings-accretive M&As.

Maintain Add with unchanged TP of S$0.93

  • We keep our FY17-19F EPS forecasts intact and maintain Add with an unchanged target price of S$0.93 (DCF valuation, 7% WACC). 
  • Potential catalyst is stronger project wins, while rising competition industry and deteriorating receivables could pose risks to the company.

NGOH Yi Sin CIMB Research | 2017-04-26
CIMB Research SGX Stock Analyst Report ADD Maintain ADD 0.930 Same 0.930