Citic Envirotech - DBS Research 2019-07-25: Better Execution Required

CITIC ENVIROTECH LTD. (SGX:CEE)

Citic Envirotech - Better Execution Required

We downgrade our rating on CITIC ENVIROTECH (SGX:CEE) from BUY to HOLD.
Our biggest concern on Citic Envirotech is execution risk as slow project execution has been the main reason for earnings disappointment. Citic Envirotech’s valuation is rather stretched given the low single-digit earnings growth in FY19.
The high adjusted net debt-equity ratio (adjusted for perpetual securities) is also a concern, climbing from 1.1x in FY18 to 1.27x in 1HFY19. We need to see more signs of recovery before we turn positive on Citic Envirotech’s growth outlook.

This was mainly attributable to a change in recognition of construction revenue and delay in certain large-scale projects since 2HFY18. Although construction and membrane solution segments in 2Q recorded q-o-q improvements, we are uncertain if the improvement can be sustained. A
s S$481.2m of perpetual securities were refinanced with bank loans in 2HFY18, finance costs jumped > 80% in 1HFY19. However, after taking dividends from perpetual securities into consideration, total finance costs increased only marginally.
We estimate YTD new project wins amounted to Rmb2.2bn, slightly down from Rmb2.7bn in 1HFY18. Total order backlog is estimated at Rmb7.5-10bn.

If the momentum in construction progress in 2Q19 can be sustained, 2H19 earnings could rebound on a low base comparison. Coupled with more project wins, Citic Envirotech’s share price could react positively.

To reflect the delay in project execution, we trimmed our target PE for treatment service from 20x to 18x and that for membrane sales from 20x to 15x. Our new Target Price is set at S$0.34.

Patricia YEUNG DBS Group Research | https://www.dbsvickers.com/ 2019-07-25

SGX Stock Analyst Report HOLD DOWNGRADE BUY 0.34 DOWN 0.950