SIIC Environment - DBS Research 2018-11-15: Progressing Conservatively


SIIC Environment - Progressing Conservatively

  • SIIC Environment's 3QFY18 net profit climbed 3.6%; 9MFY18 net profit up 5.6%.
  • 3QFY18 construction revenue dropped 58.5% due to decline in government approvals.
  • Conservative in project selection and construction progress in FY19 with focus on upgrading projects.
  • Target Price lowered to S$0.32 to reflect investors’ weaker risk appetite on high debt companies; maintain HOLD.

What’s New

SIIC reported 3.6% y-o-y increase in 3QFY18 net profit to Rmb114.3m with a 10.7% drop in PBT and 49% decline in minority interests.

  • Although total revenue fell 21% (from a 58.5% decline in construction revenue), gross profit climbed 8%, thanks to higher gross profit from service concessions. Gross margin jumped c.10ppts to 35%.
  • 9MFY18 net profit climbed 5.6% to Rmb369.9m with total revenue rising 17% to Rmb3.9bn.

New project wins during 3Q18 amounted to around 0.42m tons/day, bringing the total project wins YTD to around 0.8m tons/day.

  • SIIC is progressing steadily towards its FY18 target of > 1m tons. However, construction progress was very slow in 3Q due to slow approvals from government. It is uncertain whether the situation will improve in 4Q18.
  • In addition, in view of the current macro situation and financial environment, management is very conservative in project selection and new project win target for FY19 is likely to be conservative at just 1m tons/day.

SIIC’s strategy of focusing on upgrading projects is working well.

  • Tariffs were revised up in 3Q by 7.6% and 7.85% for sewage treatment and water supply to Rmb1.13 and Rmb2.61 per ton respectively. Within its project portfolio of > 11m tons/day, 2.5m tons is at grade 1B standard which has to be upgraded to grade 1A before 2020, based on regulations.
  • However, management reckons there are also opportunities to upgrade the remaining projects even though the treatment quality has already reached the required grade 1A standard. This is because the government’s and the general public’s demand for higher environmental quality.

We have lowered our FY18/19F earnings projections by 4- 5% to reflect the slower construction progress.

  • After the revision, we project SIIC to post a 8% earnings growth in FY88 (excluding disposal gains of Rmb888m in FY88). Growth is expected to be higher at 88% in FY88 with the absence of one-off listing expenses.
  • After the revision, we are at the low end of the market consensus. We reckon the market is too optimistic on SIIC’s growth outlook given management’s conservative strategy.
  • We have lowered our adjusted target PE (excluding construction revenue) from 88x to 88x to reflect investors’ weaker appetite on high debt companies.
  • New Target Price is set at HK$8.88 for Hong Kong market and S$8.88 for Singapore market. Maintain HOLD.

Patricia YEUNG DBS Group Research | https://www.dbsvickers.com/ 2018-11-15
SGX Stock Analyst Report HOLD MAINTAIN HOLD 0.32 DOWN 0.530