SIIC Environment Holdings - RHB Invest 2017-11-10: Another Disappointing Quarter

SIIC Environment Holdings - RHB Invest 2017-11-10: Another Disappointing Quarter SIIC ENVIRONMENT HOLDINGS LTD. BHK.SI

SIIC Environment Holdings - Another Disappointing Quarter

  • SIIC reported a disappointing set of 3Q17 results on the evening of 9 Nov after the market closed. Despite a 36% QoQ growth in revenue, GP and NP surprisingly dropped by 1% and 8% QoQ respectively. 
  • We are concerned about the fluctuation of SIIC’s construction revenue and operating GPM, as well as the company’s high gearing – even after the 1H17 placement. 
  • Downgrade to NEUTRAL (from Buy) with a lower SGD0.54 TP (from SGD0.82, 5% upside), as we cut 2017F-2019F earnings by 1-26%.

Operating GPM contraction. 

  • Although doubling construction revenue pushed up topline by 36% QoQ, SIIC Environment Holdings’ (SIIC) GP surprisingly dropped by 1% QoQ in 3Q17. 
  • Given that the construction margin is set at 12%, we estimate that GPM for non-construction segments declined 7ppts QoQ to 41% in 3Q17. This was the lowest level in the last two years, except for 4Q16 (disrupted by extraordinary mix). We find it puzzling that the stable wastewater treatment (WWT) business could have such large swings in operating GPM and tune down our GPM forecasts.

Project acquisition on track... 

  • In 9M17, SIIC acquired 617,500 tonnes/day (tpd) WWT capacity, still on track to deliver its 1.0-1.5mtpd pa capacity addition target. During the conference call after the results announcement, management indicated that there was no change in that target at this stage.

...but high gearing and tax bracket erode profitability. 

  • Despite a 350m shares placement in 1H17 to its parent company, SIIC’s net gearing still stands at 88% at end-3Q17. This is one of the highest among the WWT companies we cover. We project the net gearing to grow to 101% by end-2019 without further placement deals. 
  • Management indicated that there would not be any further refinancing of Longjiang Environmental Protection Group’s (Longjiang) debt in the near term. This means that borrowing cost may remain at round 4.7% in the foreseeable future. Management also guided that the effective income tax rate would remain at the 25-27% range.

No timeline for Hong Kong listing yet. 

  • One of SIIC’s key investment themes is its potential dual-listing in the Hong Kong market via introduction. However, management does not have a specific timeline for the IPO. Considering that the dual-listing would require EGM approval, we expect the IPO to take place in 1H18 at the earliest.
  • WWT stocks are trading at 11x 2018F forward P/E on average in both the Hong Kong and Singapore markets, indicating similar appetites among investors across the two markets for the sector. That said, we do not think the dual-listing could trigger a sharp re-rating of SIIC’s Singapore-listed shares, but may improve its liquidity to a certain extent.

Downgrade to NEUTRAL (from Buy). 

  • We cut our earnings forecast by 1-26% to reflect our updated assumptions, resulting in a lower DCF-based TP of SGD0.54 (from SGD0.82). 
  • SIIC is trading at 1.3SD below its 3-year mean, which we see as justified, given its lacklustre financial performance YTD.

Singapore Research RHB Invest | http://www.rhbinvest.com.sg/ 2017-11-10
RHB Invest SGX Stock Analyst Report NEUTRAL Downgrade BUY 0.54 Down 0.820