SIIC Environment - Growth in the price


■ 1HFY15 results slightly above our estimate on better-than-expected margins

■ Maintain target for water capacity and IRR requirement

■ Stronger contribution in 2H

Maintain HOLD with TP of S$0.18

Highlights
1H15 results slightly above our estimate. 1HFY15 net profit came in at Rmb151.5m (up 16.7% y-o-y) with revenue up 0.4% y-o-y to RMB790m. Construction revenue decreased 24% as the EPC business was divested in 3Q 2014. The drop of construction revenue was offset by the increase in the higher margin business of service concession arrangements. This also resulted in an improvement of gross margin by 4ppts to 42%, compared with our estimate of 40%. No dividend was declared.

Target capacity remains unchanged. The management reiterated their confidence in reaching their target of adding water treatment capacity of 1.5 m tons/day for FY15. We believe the company will be able to exceed its current target, with more project wins expected in 2H15. Moreover, the management is selective on acquiring projects with reasonable return, with an IRR of at least 9.5-10%.

2H15 revenue to accelerate. More revenues are expected in 2H15 from the increase in construction, higher WTE revenue and six-month contribution from Fudan Water. The newly acquired BOT projects in 1H15 are expected to start construction and make revenue contribution in 2H15. In addition, its WTE plants are expected to return to normal operation from maintenance and upgrade in 1H15, and the higher treatment volume may compensate for the slow revenue contribution in first half.

Timetable for Hong Kong listing still uncertain. We believe it is unlikely that the dual listing on Hong Kong Stock Exchange can be materialized this year. Management claimed that business deals in the pipeline have postponed the progress; thus the timetable remains uncertain.


Technical Analysis
Daily Chart
Valuation:
We have fine-tuned our earnings projections. Our TP of S$0.18 remains unchanged. TP is based on 33x FY16 adjusted PE where earnings are adjusted to reflect only operational projects. Given <10% upside, we maintain our HOLD rating.

Key Risks:
Strong-than-expected deal flows and project upgrades will have an upside risk on our earnings estimates. (Read Report)

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Source : DBS Group Research

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