United Envirotech: Entry of KKR a positive catalyst (DMG)

(BUY, S$0.38, TP S$0.51)

United Envirotech’s (UE) 1QFY12 earnings disappointed, falling 16.3% YoY to S$3.5m due to

lower than expected engineering revenue. We reduce FY12 earnings by 24.3% on slower than

expected EPC project wins (-37.6%) but raise FY13 earnings by 10.8% on the back of higher

treatment revenue offset by lower engineering revenue. UE is issuing a convertible bond (CB) to

KKR China Water Investment Holdings Limited’s (KKR). The increase in treatment revenue

estimates is to factor in utilisation of the CB proceeds in the form of new Build- Operate-

Transfer/ Transfer-Operate-Transfer/ Build-Own-Operate (BOT/TOT/BOO) investments. We

believe KKR’s investment into UE is a positive catalyst as it 1) provides UE with relatively cheap funding for its BOT/TOT/BOO investments, 2) enables UE to tap on KKR’s vast network for

resources going forward and 3) reaffirms investors of UE’s track record and long term growth

potential. With the Chinese government’s emphasis on environmental protection, the macro

outlook remains positive in our view. Our new TP of S$0.51 (previously S$0.54) is based on

10.4x FY12/FY13 blended earnings, at least a 7% discount to its larger peers.

Results below expectations. UE’s 1QFY12 earnings fell 16.3% YoY to S$3.5m, due to

revenue coming in 7% lower YoY at S$20.8m, as well as higher expenses. This was attributable

to a drop in engineering income, which was partially offset by higher treatment revenue.

Entrance of a new long term investor. UE is issuing a US$113.8m 5-year 2.5% CB to KKR,

an affiliate of Kohlberg Kravis Roberts & Co. L.P., which is a leading global investment firm with US$61b in assets under management. The conversion price of the bond is S$0.45/share and

the transaction is estimated to be completed by Sept 11. Assuming 100% conversion, there will

be 305m new shares issued, representing ~38.4% of the enlarged share capital. We understand

that KRR’s typical investment holding period is five to eight years and that they would have three new directors to sit on UE’s board (existing seven members).

Impact of convertible bond. Assuming the CB is in the money and the full conversion of the

CB at mid year, UE’s FY12 and FY13 EPS would fall by 24% and 23.7% to 3S¢ and 4.5S¢

respectively.