CITIC Envirotech Ltd - DBS Research 2017-10-04: Uncertainty In Project Execution

CITIC Envirotech Ltd - DBS Vickers 2017-10-04: Uncertainty In Project Execution CITIC ENVIROTECH LTD. CEE.SI

CITIC Envirotech Ltd - Uncertainty In Project Execution

  • Venturing into hazardous waste treatment, providing more comprehensive environmental services.
  • Growing order backlog with project wins of Rmb4.8bn YTD.
  • But project execution is slow; revise down FY17/18 earnings estimates by 17-18%.
  • Valuation looks unattractive; downgrade to HOLD with revised TP of S$0.80.



Project execution is the key. 

  • We downgrade our rating on CITIC Envirotech (CEL) from BUY to HOLD. 
  • We see some positive developments in CEL, including a growing project pipeline with new initiatives in hazardous waste treatment market, and plans to set up investment funds to finance its public-private- partnership (PPP) projects. However, CEL needs to accelerate the construction progress in 2H in order to justify its current valuation which is higher than its peers.


Market expectation on construction progress is too high. 

  • Our earnings estimates are 7-10% lower than the market consensus. We have more conservative assumptions on CEL’s project execution and engineering revenue.


Acceleration in execution. 

  • Slow project execution was the main reason for the disappointing 1HFY17 results. Thus, acceleration in construction progress, which will lead to strong growth in construction revenue and profit, will be positive to share price.


Valuation

  • We have cut our FY17F/18F earnings estimates by 17-18% to reflect the slower-than-expected construction progress, Our TP is revised down to S$0.80, based on 25x 12-month rolling PE (adjusted for construction revenue) for treatment services, and membrane sales.


Key Risks to Our View

  • Delay in construction progress could hurt top-line growth.




Patricia YEUNG DBS Vickers | http://www.dbsvickers.com/ 2017-10-04
DBS Vickers SGX Stock Analyst Report HOLD Downgrade BUY 0.80 Down 0.920



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