CITIC Envirotech - Optimising capital structure

■ CEL announced a US$750m perpetual securities issuance programme. According to Bloomberg, there are also talks for a S$192m dividend recapitalization facility.

■ The company is close to clinching Rmb1bn (S$225m) new water projects, which would drive future earnings growth.

■ We keep our FY15-17 EPS and DCF-based target price. Reiterate Add.

US$750m perpetual securities issuance programme
CEL recently announced that they would establish a US$750m multi-currency perpetual securities issuance programme. At an indicative pricing of around 5.45%, this could lower overall finance costs if used to retire some of its existing debt (average cost of 8.4% previously). Management guided that approximately US$175m will be utilised for its upcoming projects.

Project additions (PPP, TOT, BOT) to the pipeline
On 18 Nov 2015, CEL also announced a few potential new projects in water supply, wastewater treatment and recycling, comprising a mix of industrial and municipal projects. These would be worth at least Rmb1bn (S$225m) and the company is currently in advanced stage of negotiations. We think negotiations may be completed by end-FY15 or early-FY16 and make meaningful revenue contribution in FY17.

KKR in talks for S$192m dividend recapitalisation facility for CEL
There is Bloomberg/ Reuters news that Kohlberg Kravis Roberts (KKR) is in talks to seal a S$192m syndicated loan (3-year bullet) for CEL, the proceeds of which will be used for dividend recapitalisation. Assuming full payout, this could translate into special dividends to benefit all shareholders. As at end Sep 2015, CEL’s net gearing ratio was c.45.6%.

Technical Analysis
Daily Chart
Maintain Add with unchanged DCF-derived target price of S$1.80
With the announced project additions to the pipeline, CEL is on track to attain our capex assumptions (FY15: S$225m, FY16-17: S$250m p.a.). We keep our FY15-17 EPS forecasts, DCF-based target price of S$1.80 (WACC: 6%) and Add rating, pending further clarity and details on the capital restructuring. We think an optimised capital structure will help improve CEL’s ROE and provide them with financial resources to seize investment opportunities. (Read Report)

Source : CIMB Research

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