SIIC Environment Holdings - RHB Invest 2017-08-14: Dragged Down By Higher Interest Cost

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SIIC ENVIRONMENT HOLDINGS LTD. BHK.SI

SIIC Environment Holdings - Dragged Down By Higher Interest Cost

• SIIC announced its 2Q17 result last Friday. 2Q17 PATMI grew 19% YoY to CNY120m. 
• Overall, operating profit came in ahead of our expectation, as most of the large projects have completed their construction phases and commenced operations. However, growth in PATMI was not as strong as expected due to higher interest cost after acquiring Longjiang Group last year. 
• Maintain BUY, with a lower SGD0.82 TP (from SGD0.96).

Strong operational growth in 2Q17. 

• SIIC Environment Holdings’ (SIIC) 2Q17 revenue grew 79% to CNY995m, while operating profit more than doubled to CNY280m. This is mainly attributed to the acquisition of Longjiang Environmental Protection Group (Longjiang Group) and Ranhill Water (Hong Kong) Ltd (RWHK) last year.
• We note from management that SIIC has past the peak of its construction phase. As such, revenue from operations grew much faster (+192% YoY) than construction revenue (+59% YoY) in 2Q17. 
• Since operating revenue has stronger margins, we expect to see gross margin expansion for the group over the next three years.

Slower-than-expected refinancing of Longjiang Group’s debt. 

• Overall, 2Q17 operating profit was dragged down by higher finance expenses. This was due to the higher-interest bearing debt and high gearing of Longjiang Group.
• Management guided that it has refinanced a portion of the latter’s debt with interest costs of 6-plus to 4-plus percent. However, it would take another six months to one year to replace all of Longjiang Group’s debts.

Positive growth outlook. 

• YTD, SIIC has secured 540,000 tonnes of daily wastewater and water treatment capacity. Of this, 200,000 tonnes are already operational. This is on track, with management’s historical guidance to grow 1- 1.5m tonnes of daily treatment capacity each year.

Maintain BUY, with a new TP of SGD0.82 (from SGD0.96). 

• We adjusted our forecast for SIIC’s interest costs and lower our forecasts by 11-14% for FY17- 19. This lowers our DCF-derived TP to SGD0.82.
• However, we are still very much positive on the group’s outlook. This is given that the majority of its construction projects have been completed and are moving into operational phase. This, together with newly-secured contracts, should help growth in the near term.

Juliana Cai CFA RHB Invest | http://www.rhbinvest.com.sg/ 2017-08-14

RHB Invest SGX Stock Analyst Report BUY Maintain BUY 0.82 Down 0.960