SIIC Environment - DBS Research 2019-01-16: Growth Strategy Too Conservative

SIIC ENVIRONMENT HOLDINGS LTD. (SGX:BHK) | SGinvestors.io SIIC ENVIRONMENT HOLDINGS LTD. (SGX:BHK)

SIIC Environment - Growth Strategy Too Conservative

  • Expect new daily capacity of only 1m tonnes in FY19, or < 10% growth.
  • Focus on upgrading projects in traditional water market.
  • Missing out opportunities in other water subsegments.
  • Maintain HOLD with Target Price of HK$1.80 or S$0.32.



Stable earnings growth.

  • Our rating on SIIC ENVIRONMENT HOLDINGS LTD. (SGX:BHK) is HOLD.
  • SIIC Environment’s conservative development strategy and slow progress in construction work have resulted in stable earnings growth. Although its strategy of focusing on upgrading projects is working well with tariff hike at high single digit, the current macro situation and financial environment have prompted management to stay cautious in project selection.
  • SIIC Environment’s target for new project wins in FY19 is likely to stay flat at just 1m tonnes/day or less than 10% growth in project portfolio.


Missing opportunities in the water market.

  • We reckon SIIC Environment’s two-pronged growth strategy is too conservative as it only focuses on the traditional water treatment market and ignores the huge potential in other water sub-segments, such as water environment management and black and stinky water body. We believe it is increasingly difficult to grow by securing traditional water plant projects and mergers and acquisitions (M&A).
  • Medium-term growth in SIIC Environment’s order backlog could be negatively affected. Our earnings forecasts are at the low end of market consensus.


No positive share price catalyst in the short term.

  • We reckon that faster approval from the government for commencement of construction and faster deal flow would be positive for SIIC Environment’s earnings growth as well as share price. However, we do not expect these two factors to materialise in the short term.


Valuation:

  • Our Target Price is set at S$0.32 or HK$1.80, based on 13x FY19F PE (excluding construction revenue). HOLD.


Key Risks to Our View:

  • Faster-than-expected deal flows, project upgrades and tariff hikes are upside risks to our earnings estimates.





Patricia YEUNG DBS Group Research | https://www.dbsvickers.com/ 2019-01-16
SGX Stock Analyst Report HOLD MAINTAIN HOLD 0.320 SAME 0.320



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