Sanli Environmental Limited - Tayrona Financial 2019-05-03: Growth To Accelerate With Record Order Book

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SANLI ENVIRONMENTAL LIMITED (SGX:1E3)

Sanli Environmental Limited - Growth To Accelerate With Record Order Book

• SANLI ENVIRONMENTAL LIMITED (SGX:1E3) has secured approximately S$118m of new contracts from Nov 2018 to 2 Apr 2018. These wins have in turned raised Sanli Environmental’s order book to a record high.
• We like the forward visibility that these contracts provide – suggesting positive revenue and earnings for FY20 and FY21.
• Other than these contracts, we also estimate that there are more than S$100m of contracts that will be made available for bidding from now to June 2020. Hence, there will also be opportunities for order book renewal over the next one year.

Spate of contract wins bolsters outlook

Strong order book of S$198m (2.6x FY18 revenue).

• SANLI ENVIRONMENTAL LIMITED (SGX:1E3) announced on 2 April 2019 that it has secured S$12.1m of new contracts since late January. These contracts add on to S$51.5m of PUB contracts announced on 22 January 2019 and S$54.3m of new contracts announced on 15 November 2019. All in, Sanli Environmental’s order book has ballooned from S$110.2m as at 31 March 2018 to S$198.0m as at 2 April 2019. See Sanli Environmental's announcement dated 2 Apr titled 'Sanli bags new contracts in Singapore and Myanmar; boosts order book to S$198.0 million'.
• We are encouraged by the high order book growth. Most of the contracts will be completed within or before 31 March 2021 or FY21. Only one S$54.3m contract and one S$1.66m contract will stretch to FY22. Hence, we can expect the strong order book today to translate into higher revenue for FY20 and FY21.
• Sanli Environmental reported revenue of S$75.6m for FY18. We estimate that the group is likely achieve revenue of around S$87.5m and S$91.9M for FY20 and FY21 respectively.

Diversifying customer base.

• Of the eight new contracts that we obtained from both GeBiz and company announcements, most of them are from the Public Utilities Board. The S$54.3m of contracts announced by the company on 15 November 2018 mainly referred to a sub-contract from Boskalis / Penta-Ocean Joint Venture for the supply and installation of mechanical (water management) package works at Pulau Tekong from FY19 to FY22 (four years).
• In addition, the group also secured two new Myanmar contracts worth S$1.8m and S$2.5m in 2019. Hence, the new contract wins not only raised the group’s outlook but also show that the group is successfully diversifying its revenue base to include private sector and foreign government projects.
• See Fig3 in attached PDF report for summary on the new contracts won by Sanli Environmental and respective contract size and revenue recognise period. 

Maintains leadership position in public tenders

Maintains high 30% contract win rate.

• We counted the tenders that Sanli Environmental participated in, based on award dates from 4 December 2018 to 27 March 2019. Of these 15 tenders, Sanli emerged as a market leader, winning 5 out of 15 contracts. Of these 5 projects, Sanli Environmental won 4 of them as the lowest bidder. For one project (Overhaul of centrifugal pumps, disintegrators and related equipment and maintenance works at PUB installations), Sanli Environmental won the contract even though its bid was 11% higher than the lowest bid.
• The remaining projects were won by at least eight other vendors with Memiontec securing two membrane related contracts of a total value of S$13.98m.1 In fact, Sanli Environmental’s bids were very close to that of Memiontec, losing out by only 3.7% and 8.3% respectively from the lowest bids. As for the other contracts, Sanli Environmental typically lost out to the lowest bidder by an average of 33%. See Fig5 in attached PDF report for the list of tenders participated by but not awarded to Sanli Environmental.
• Sanli Environmental’s bidding behaviour shows that the group focuses on niches where it has cost and operating advantages and does not slash prices to compete for projects. The group has an average gross margin of about 15% since FY17.

Expect one more contract win.

• As at 27 March, Sanli Environmental has further participated in six unawarded GeBiz tenders of which it is the lowest bidder for a S$5.19m contract to service, maintain and repair the chemical dosing system and other minor works at Johor River Waterworks. See Fig7 in attached PDF report. 

More than S$160m of contracts available for bidding

• We further extracted a list of open tenders from GeBiz and upcoming tenders from PUB based on the registered workheads of Sanli Environmental. The list of upcoming tenders on the PUB website includes purchases that were supposed to be made in March 2019 or earlier. To avoid double counting with tenders that are already on GeBiz, we only take into consideration upcoming tenders whose purchases are supposed to be made after March 2019. Using the tender limits as a proxy, we estimate that current announced upcoming and open tenders have a combined value of at least S$160m.
• Sanli Environmental is graded C1 with a tender limit of up to S$4.0m for CW02 civil engineering, L5 with a tender limit of up to S$13.0m for ME02 building automation, industrial and process control systems, L6 with unlimited tender capacity for ME05 electrical engineering and ME11 mechanical engineering and L3 with a tender limit of up to S$4.0m for SY08 mechanical equipment, plant and machinery.

Tenders for billion-dollar TWRP will also be ramped up

• Sanli will also benefit from the slew of contracts to be awarded for the Tuas Water Reclamation Plant (TWRP). The TWRP has been estimated to cost more than S$2 billion and its construction will be split among 11 construction tender packages. See Tuas Water Reclaimation Plant DTSS2 industry briefing document by PUB. 

Financial Review & Forecasts

Profitability rebounded in 1H19.

• Sanli Environmental reports its results on a semi-annual basis. For the first half FY19 ended 30 September 2018, group revenue grew by 13% to S$34.7m. Profit attributable to shareholders grew by 168.8% from S$0.66m in 1H18 to S$1.77m in 1H19 mainly due to the absence of one-off IPO expenses of S$1.2m.

Expect stable growth for FY19.

• Sanli Environmental is due to report its full year results at the end of May 2019. We expect group revenue to grow modestly or by 2% to S$75.61m for the full year. Many of the contracts were only awarded in 2019 and will contribute more significantly from FY20 onwards. We expect gross margin to remain stable at about 15%.
• In all, we expect Sanli Environmental to report full year profit attributable to shareholders of S$4.25m, implying profit attributable to shareholders of S$2.5m for 2H FY19 (2H FY18: S$2.4m). We expect higher administrative expenses (S$6.0m on a trailing 12-month basis vs S$5.25m for FY18) to partially offset savings from the absence of IPO expenses in FY19.

Growth to kick in FY20.

• Sanli Environmental’s order book leads us to expect the group to clock revenue of S$87.5m for FY20. In addition, existing projects will account for S$44.64m and S$18.9m of projected revenue for FY21 and FY22.
• We forecast revenue of S$91.9m and S$96.5m (5% growth per annum) for FY21 and FY22. Sanli Environmental essentially has one to two years to win another S$125m of contracts to meet our forecasts for FY21 and FY22.

Valuation & Recommendation

• We benchmark Sanli Environmental against other SGX listed environment companies (China Everbright Water (SGX:U9E), China Jinjiang Environmental (SGX:BWM), CITIC Envirotech (SGX:CEE), SIIC Environment (SGX:BHK), Moya Holdings Asia (SGX:5WE), Darco Water Technologies (SGX:BLR)). See Fig12 in attached PDF report.
• Peers trade at an average P/E of 10.41x and EV/EBITDA of 9.56x. Based on Sanli Environmental’s FY20F earnings, we estimate that the group may be worth S$0.193 per share using the peer average P/E or S$0.275 per share using the peer average EV/EBITDA.
• We see upside in Sanli Environmental from the following factors
  1. The group is focused on technically complex projects, such as membrane and filtration processes, that command higher margin than plain vanilla engineering, procurement and construction (EPC) projects.
  2. Our forecasts do not include upside from potential contract wins from the Tuas Water Reclamation Plant.
  3. The group enjoys lower gearing than its peers due to its focus on higher margin and shorter gestation contracts, of the overall EPC project.
• Taking the average of S$0.193 and S$0.275, we peg Sanli Environmental fair value at S$0.234 (rounded to S$0.235) with potential upside of 30.5% from the current Sanli Environmental share price of S$0.180.
• In view of the upside, we rate Sanli Environmental Overweight.

Key risks.

• While the group’s order book gives us visibility over the outlook for FY20 and FY21, we have limited certainty over the group’s 2H FY19 performance as the group recognized only S$34.7m of revenue for 1H FY19 as opposed to S$44.9m for 2H FY18. See attached PDF report for details.

Liu Jinshu Tayrona Financial Research | http://www.tayronafinancial.com/ 2019-05-03

SGX Stock Analyst Report OVERWEIGHT INITIATE OVERWEIGHT 0.235 SAME 0.235