Maintain BUY
Previous Rating: BUY
Current Price: S$0.35
Fair Value: S$0.53
Issuing US$113.8m CBs to KKR. United Envirotech Ltd (UEL) announced over the weekend that it has entered into a purchase agreement with KKR China Water Investment Holdings (KKRCWI) for a proposed issue of US$113.8m of 2.5%-coupon convertible bonds (CBs) due 2016. The non-recallable CBs can be converted into new ordinary shares at S$0.45 per conversion share, or a premium of 37.3% over the 30-day average price of S$0.328; if the CBs are fully converted, the number of conversion shares to be issued by UEL would amount to 305m, or 38.4% of its capital base on a fully-diluted basis. UEL intends to use 90% of its proceeds to fund its BOT, TOT and BOO projects and up to 10% for working capital needs.
Positive on KKRCWI's investment. We view the investment positively, as it suggests that KKRCWI is cognitive of the potential of China's water industry, and more importantly, of UEL's technology and execution track record. Furthermore, management believes that it can also tap on KKR's global network, strong operational capabilities and extensive local knowledge; this as KKRCWI can nominate three non-executive directors to UEL's board. And from our teleconference with management and KKRCWI, we understand that the group has identified several BOT and TOT projects; and while no timeline has been given, KKRCWI says it has high degree of confidence that the proceeds will be meaningfully invested in viable water projects soon.
1QFY12 results mostly in line. Separately, UEL also announced its 1QFY12 results, with revenue easing 7% YoY (but +4.9% QoQ) to S$20.8m, while meeting 23.4% of our FY12 estimate; this as engineering revenue declined 17.5% YoY but was offset by 60% increase in treatment revenue. As treatment revenue typically comes with much higher margins, its gross margin recovered to 43.5% in 1QFY12 from 20.8% in 4QFY11. While reported net profit dropped 16.3% YoY to S$3.5m, it surged 114.7% QoQ, meeting 20.4% of full-year forecast. UEL is also currently sitting on cash of S$44.9m (as of end Jun), with its net gearing of 12.6%.
Maintain BUY. As before, we remain positive on the water industry in China and continue to believe that UEL has the technology and track record to make further inroads into the market. We also believe that the latest investment by KKR will be very well received by the market and the enlarged warchest will allow UEL to compete more favorable against the bigger players. Hence we maintain our BUY rating with an unchanged fair value of S$0.53.
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