United Envirotech - BUY on CITIC deal

■ Results below expectations on weak engineering revenue. Other high-quality revenue streams remained solid 
  
■ Cut EPS by 3-7% on lower engineering revenue forecasts 

■ BUY on game-changing CITIC deal. TP unchanged at SGD2.0

Below expectations 
United Envirotech’s 1QFY3/16 results were below our expectations. Reported net profit of SGD3.7m was down 84% YoY due to one-off items. Excluding one-off gain of SGD14.2m from disposal of Memstar incurred last year and one-off fees of SGD6.5m relating to the CITIC deal this year, adjusted net profit grew by 20% YoY in 1Q. Adjusted net profit formed 16% of our full-year forecast. 

Sector-wise, treatment fees increased by 76% YoY and membrane sales increased by 28% YoY, both meeting expectations. The growth in treatment fees was driven by acquisitions. Key miss for this quarter was from engineering division which declined slightly. 
  
Maintain BUY with unchanged TP Although 1Q net profit fell short of our expectations, we are not overly concerned as the miss was largely from the engineering division which is lumpy and low-margin in nature. UENV’s highmargin and more stable revenue streams, i.e. wastewater treatment and external membrane sales, remained solid. 


Technical Analysis
Daily Chart
Our investment thesis for UENV remains intact 
As CITIC becomes controlling shareholder, UENV is entering a new growth chapter by leveraging CITIC’s resources. We believe investors should not focus too much on its near-term earnings volatility during transformation period but on its long-term growth potential. Thus we now value UENV based on average EPS over the next three years instead of FY3/16 EPS. We cut EPS by 3-7% for the next three years on more conservative engineering revenue forecasts but maintain BUY call. Our TP is maintained at SGD2.0, pegged to 27x PER, a 10% discount to peers due to its smaller recurring income base. (Read Report) 

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Source : Maybank Kim Eng Research

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